Over the last twenty years, entrepreneurs flocked to sexy industries like retail, tech, and services in fields like medicine, digital, and finance. The appeal of these businesses is that they’re basically clean and don’t require massive startup costs. Some, like retail, don’t even require a college degree or specialized licensing. Tech and related areas such as NFTs and Cryptocurrency are touted as the next big thing, encouraging entrepreneurs to race into these areas. However, despite the appeal of these industries for folks considering a new business, the reality is that you might face a lot of competition (especially in retail), declining demand (especially for crypto and NFTs), uncertainty (especially in digital and finance) that make your new venture inherently risky. However, manufacturing is back and may offer you the business opportunity you’ve been looking for. Let’s take a look at some reasons why manufacturing offers a great option as well as some downsides to starting a new business in this industry.
In the depths of the pandemic, manufacturing suffered as it meant bringing people in close proximity where the disease might spread. Thus, it was hard to attract workers and maintain sufficient staff to run the business. After all, manufacturing usually involves many steps and you only ring the cash register once you have a finished product. Plus, supply chain issues meant you faced challenges getting finished goods to where the consumers needed them. Many of those deterents are now a thing of the past and manufacturing is having its day in the sun. Manufacturing is back.
Plus, after decades that saw manufacturers sending their operations overseas where they faced lower costs for the mostly unskilled work required to turn raw materials into finished goods, manufacturing is coming back to Western economies.
But what’s driving the reemergence of manufacturing and return to Western countries? That’s the question on many entrepreneurs’ lips.
Why manufacturing is back
Let’s face it, the cost of building a manufacturing plant is high and, while there are many ways to reduce those costs using leverage, you still need a pot of money to get started. In contrast, you might start a service business like a consulting firm or hang out a shingle as a financial advisor with very little capital. Renting a small office and supplying a computer comprise your biggest expenses. You don’t need a large staff and you might not even need a good location for this type of business. In retail, while location is a bigger concern, you can manage with unskilled staff, which helps you find workers more easily and depresses wages. In contrast, a manufacturing operation might require skilled workers like machinists who are harder to find and require a higher hourly wage. And, unlike the service industry where a computer might represent your largest expense when it comes to equipment, a manufacturing operation might require very expensive and varied equipment such as conveyor systems, massive furnaces, and specialty equipment that adds up. These costs vary dramatically based on the product, region, and raw materials so you may be looking at something starting at around $33,000 up to multiple millions of dollars. Meanwhile, a new factory starts at around a million dollars and runs into the billions. [source]
And, startup costs aren’t the only difference when you decide to invest in a manufacturing operation. You must:
- source raw materials
- find trained staff
- license or patent the products you plan to make
- hire a bunch of folks from management to safety experts to marketing to financing because a manufacturing operation isn’t a one-man job
Despite these challenges, manufacturing is back, as we said and it’s back in Western countries. First, let’s explore the factors contributing to bringing manufacturing back to high-wage countries in the West after decades of sending it to low-wage countries in Asia, Latin America, and Africa.
The main driver of the reshoring of manufacturing in the US (and some other Western countries) is cost dynamics. In the 1990s and early 2000s, wages in China were less than a tenth of what they were in wealthier nations. However, that cost advantage virtually evaporated over the last ten years when you consider the massive transportation costs involved in getting products made a world away to Western customers. This forced many companies to reconsider where they manufacture their products and component parts. Apple is still investing heavily in China, but it is a member of a dying breed. Most firms are either returning home or looking for opportunities elsewhere in Southeast Asia or Mexico.
There’s also an opportunity cost inherent in locating your manufacturing operations far from your consumer market. Let’s say you manufacture clothing in Malaysia, for instance. You estimate demand, manufacture the garments, and ship them to markets in the US and Western Europe. Maybe demand explodes because Taylor Swift wore one of your products for an interview and now everyone wants to buy it. Well, you have a problem because it will take you MONTHS to get more product through the sluggish logistics channels involved in international marketing. By the time you can resupply, the demand may have moved on to the next celebrity trend.
We’re also seeing geopolitical tension play an increasingly important role in where companies do their manufacturing. During the peak of globalization, firms weren’t afraid to ship assembly and production overseas to sweatshops. Now, though, that’s changing and firms are looking for safer places to do business that offer less risk. Among the risks we see in international manufacturing operations are:
- Expropriation happens when a foreign country takes over your operation without offering competitive compensation. For instance, US car companies lost billions of dollars when Castro came into power in Cuba and nationalized foreign plants.
- Civil unrest can damage or destroy your plant and equipment as well as killing your staff
- Customers in Western countries might reject your products based on where they come from as national sensitivities change
- Boycotts might follow if consumers don’t respect your chosen manufacturing hub. For instance, they might not want to buy your product if they feel the workers building the product weren’t fairly compensated for their work.
- You might lose product when a ship carrying your goods sinks through human or natural causes
Again, that rules out markets like China and, to a lesser extent, places like India and Africa. U.S. global maritime presence is receding, so companies that make products overseas are, too.
Advances in manufacturing
Advances in manufacturing technology are also driving the reshoring trend, and will likely go into overdrive in the months and years ahead. We are already seeing numerous precision machine shops popping up across the country as robotics and other automation methods take center stage.
Again, specific advances in technology are driving this. While car plants have been using robot arms for over fifty years, these tools were dumb and couldn’t respond to changes in the environment. The new generation of AI-enabled technology is changing that. Thinking machines can respond to their surroundings while also understanding where they are and what they are doing.
We are also seeing government support and political shifts encouraging the reshoring of more manufacturing operations. While deglobalization is a disaster for many small nations, it is a boon for places like the U.S. that have massive internal economies and don’t rely on lots of imports. It will still have some effect, but increased internal demand from higher wages could prevent that.
There’s also a renewed sense of national pride and effort. Many companies feel buoyed by pro-American sentiment and various subsidies and support measures for companies to return home. Tax breaks could mean even more firms return from their overseas bases and return to the U.S. manufacturing heartland that globalization gutted over recent years.
Finally, many industries are seeing a resurgence in local demand. Pharmaceutical and tech firms are investing heavily in building technologies that let them operate closer to their target markets. The main driver is profitability, but government protection is also playing a role.
Another trend is technology in the manufacturing process. For instance, 3D printing allows companies to build prototypes or even complete products faster and use a variety of materials, such as concrete or other liquid and slurry materials. That combined with the use of AI-enabled machines means companies can no longer rely on unskilled labor to complete their work.
These are just a few reasons why manufacturing is back in the Western world after decades of offshoring. More broadly, manufacturing is back as a viable option for entrepreneurs who want a more stable business option.
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