In this Supply Chain Byte, Lisa Anderson, President of LMA Consulting Group, spotlights the unmatched power of manufacturing in driving economic growth. From job creation and innovation to fueling supply chains and national security, manufacturing is at the heart of a thriving economy. Tune in for a quick dive into why forward-thinking businesses must prioritize and invest in their manufacturing strategy to stay competitive.
There is a $1.2 trillion dollar trade deficit, and that amount is not sustainable to secure supply. Much of the U.S. manufacturing base has been lost which is not sustainable to support critical industries such as defense, pharmaceuticals, and infrastructure equipment. Since 1997, 5 million manufacturing jobs have been lost, and 90,000 factories have been closed. Unfortunately, you cannot pick and choose pieces of the end-to-end supply chain as you are only as strong as your weakest link. Thus, you must have reliable access to rare earth minerals, plastic, steel, forgings, etc. Thus, Trump released a bombshell announcement on reciprocal tariffs (which are actually proportional tariffs).
The reciprocal tariffs created a severe reaction on the stock market as businesses are largely dependent on “cheap” items in their end-to-end supply chain, and with quarterly earnings ruling the day, their attention is focused on the short-term. During Trump’s first term, when tariffs were rolled out, companies moved from China to lower cost countries; however, China moved supply to those same countries, thereby somewhat achieving an end-run on the tariffs. It is likely that the reason China was building massive factories in Mexico but put an immediate stop to construction in the fall is for this same reason. Thus, tariffs will take effect while deals are negotiated, and as companies reconfigure their supply chains.
There are concerns about inflation as tariff price increases are likely to be partially passed on to consumers; however, there are also concerns about a potential recession as businesses might pull back. On the other hand, forward-thinking manufacturers are building manufacturing capabilities and securing resources (suppliers, talent, technology) as a manufacturing boom will result. Our best estimate is that 25% of what is sourced in China will transition to the U.S. over time, which will stimulate a manufacturing resurgence. For every $1 invested in manufacturing, $2.67 is added to the economy. Clearly, this will stimulate growth. Is it no wonder everyone wants to be a manufacturing powerhouse?
We also project that regional supply chains will be the future. China produces at scale, and so small changes in their manufacturing activity will result in huge increases for the U.S. and Mexico (both are able to produce at scale to meet the tremendous volumes required to satisfy the U.S. consumer). Yet that alone will not be sufficient. Thus, Latin American manufacturing and access to strategic sources of natural resources and rare earths will prove vital.
Investments are already moving in this direction. Over $5 trillion dollars of investments into the U.S. economy (manufacturing, data centers, etc.) have been announced in the last few months, and the tariffs on automobiles are stimulating domestic production from companies like Hyundai and Audi with expansion by many others. Ford, GM, and Stellantis are all rolling out and/or expanding domestic production and providing incentives (employee pricing) to stimulate growth.
However, tariffs alone will not cut it. Tariffs must be accompanied with deregulation (which quickens the pace for business expansion and reduces the costs), increase the access and lower the cost of energy (as it powers manufacturing and is a significant cost factor), and cut taxes (so the U.S. is competitive for business investment). Assuming these policies go into effect, growth will be enormous.
Smart manufacturers are preparing for success. During times of volatility, companies will have more opportunities to grow and succeed. In fact, more forward-thinking companies that invested smartly during the Great Depression shot to the top of their market/ industry than at any other time in history. Although depressions are not expected, this will be a time of extreme VUCA (volatility, uncertainty, complexity, ambiguity) and reconfiguration (not significant recession), leading to more opportunities than ever before for proactive, forward-thinking, innovative companies. Create resiliency so that you can leverage the opportunity and prepare for success while riding the storm. Focus on increasing your manufacturing capabilities, securing your end-to-end supply chain, and upgrading your processes, talent, and technologies.
If you are interested in reading more on this topic:
Industrials & Manufacturing Roar Back: Are You Ready to Scale?