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Manufacturing: 3 Domestic Supply Chain Obstacles

1/21/21

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By Ross Walker, Senior Accountant, CPA

The manufacturing industry's dependence on foreign suppliers, especially those in China, has caused many concerns for years. However, COVID-19 has put a spotlight on this issue even more so, forcing some manufacturers to rethink their business arrangements overseas. Which presents the question - would your business be better off switching to U.S. supply chain partners? Ross Walker highlights some important information to consider, including three challenges to successfully move to domestic supply chains.

Foreign Threats

Manufacturers may have concerns related to foreign business arrangements. For starters, the potential for intellectual property theft and cybersecurity breaches involving China and other foreign countries has presented major risks in recent years.

In addition, during the COVID-19 pandemic, many companies' supply chains were disrupted as China struggled to address pandemic risks and was forced to suspend or severely limit operations. Simply put, Chinese suppliers have been unable to meet global demand for consumer goods, industrial needs and much-needed medical equipment.

In light of these issues, so-called "reshoring" initiatives — that is, plans to bring jobs, customer service and supply agreements back to the United States — have become economically and politically expedient. However, restoring America's place in the global pecking order is easier said than done.

3 Challenges

To move successfully to domestic supply chains, U.S. manufacturers face three major obstacles:

1. Cost efficiency. Despite recent inroads, it's still generally cheaper to produce goods in China and other foreign countries. Cost remains a key factor and could deter reshoring efforts, especially if the United States experiences inflation and labor costs increase in 2021. U.S. manufacturers are seeking a lifeline from the federal government through subsidies, tax breaks and other incentives that could help defray higher costs for domestic production.

2. Skills gap. A recent study conducted in association with the National Association of Manufacturers found that 62% of U.S. manufacturing companies currently report a worker shortage. That problem is expected to worsen as older, more-experienced workers retire without younger workers to replace them. To help bridge the gap, some manufacturers are implementing training programs that target "second-chancers," such as rehabilitated felons and individuals with prior drug-related problems.

However, the skills gap trend also can be attributed to a systematic problem: many U.S. educational institutions have failed to emphasize opportunities in manufacturing, and the perception that manufacturing is a dead-end field often exists. To remedy this situation, school districts need to introduce and support science, technology, engineering and mathematics (STEM) programs, starting in elementary schools. Additionally, high schools, vocational programs, and colleges should continue to partner with the manufacturing sector to promote the industry's use of advanced technology and growth opportunities.       

3. Infrastructure concerns. Over the last 50 years, the United States has shifted from a manufacturing economy to a service economy, and its infrastructure has been largely neglected. This deteriorating infrastructure puts domestic manufacturers at a disadvantage globally. Significant infrastructure investment — including rebuilding road, bridges, railways and power facilities — is needed to get America back on track. Federal and state governments must take on this challenge.

Biden's Plan

"Made in America" is expected to be more than just a catchphrase, starting in 2021. Fortunately, President Joe Biden has proposed the following federal tax law changes to encourage manufacturers to reshore their operations:

  • A 10% tax credit for investments designed to create U.S. manufacturing jobs or modernize U.S.-based manufacturing facilities,
  • A 30.8% tax penalty on profits for companies that offshore production while selling products back to the United States,
  • Increased tax incentives for domestic R&D, and
  • Higher taxes on foreign profits of U.S. companies.

Biden would like to allocate substantial financial resources to his Made-in-America effort. For example, he's proposed resurrecting federally funded institutes created during the Obama administration for applied research in manufacturing. And he's expected to push for requirements for the U.S. government to "buy American."

However, the president can't enact these changes alone. So Biden's plans will require buy-in from Congress.

A Customized Approach

Every supply chain has unique threats and opportunities. Contact your VonLehman advisor to assess your position in today's uncertain marketplace and help determine what changes you should consider making to your business plan in 2021 and beyond.