In order to meet supply chain risks head-on, both Washington and businesses are rolling out strategies and action plans to build manufacturing centers in the U.S. This move is in response to the high level of shipping disruptions that appear to be chronic. Washington has launched several well-known plans to mitigate these issues. Meanwhile, some companies exporting to the U.S. are quietly making plans to increase manufacturing closer to their American customers.
Ikea, a privately held Swedish company, is aggressively devising a plan to produce more products in the Americas. They are joining many other firms across various industries in this effort. This trend is reshaping manufacturing, and impacting the overall economic dynamic.
Business Response to Supply Chain Issues
Whether due to COVID-19 a few years ago, growing geopolitical tensions today, or even Houthi militant attacks in the Red Sea, each shipping problem has highlighted the need for companies to rethink their strategies.
Today, more than anything else, the escalating U.S.-China trade war and the Red Sea horrors are disruptive. This has led businesses, including Ikea, to consider relocating production for the U.S. market to North America, a strategy known as onshoring.
Executive Order and the CHIPS Act
The U.S. government has also taken a proactive approach to the shipping issue. President Biden’s June 14, 2024 directive, Executive Order on Supply Chain Resilience, emphasizes the need to strengthen domestic production capabilities to reduce vulnerability. It highlights the importance of secure, diverse, and agile supply chains to ensure economic and national security.
Also, the CHIPS and Science Act, passed in August 2022, plays a crucial role in bolstering domestic production capabilities. It provides incentives for semiconductor production within the U.S. and restricts foreign subsidies for manufacturers producing in “countries of concern” like China.
Growing U.S. Manufacturing
Despite recent fluctuations in the trendline, U.S. manufacturing shows signs of growth. The Institute for Supply Management (ISM) reported a rise in its manufacturing PMI to 50.3 in March 2024. Industrial production also increased by 0.4% in the same month.
The data was driven by strong outputs from motor vehicles and planes. It’s important to highlight that spending on new manufacturing construction surged to $114.7 billion annually a year ago, reflecting a significant investment in domestic infrastructure.
IKEA’s Strategy: Avoid Global Disruptions
Currently, IKEA produces only about 10% of its goods sold in the Americas regionally. The company is now looking to significantly increase this percentage. By expanding local production, IKEA aims to minimize the risks associated with long supply chains and geopolitical uncertainties.
This shift mirrors a broader trend among businesses that seek, not just to avoid risk, but also to shorten supply chains and reduce dependence on Asian factories.
Benefits of Onshoring
The U.S. is seeing a significant increase in onshoring efforts, particularly in sectors that are heavily reliant on global supply chains. From an economic perspective, onshoring contributes to job creation and revitalizing industries. The resurgence of U.S. manufacturing is expected to generate significant employment opportunities across various sectors, including microchips, automobiles, defense, energy, and even agriculture.
Despite potentially higher labor costs, onshoring can also lead to overall cost savings when considering reduced transportation expenses, customs duties, and lower supply chain risks. It also enables faster response times to market changes and fosters a positive brand image, as consumers often view companies that support local economies favorably.
Key Takeaway
Ikea’s decision to increase its production footprint in the U.S. and the Americas is one example of a strategic response to the escalating global supply chain disruptions. By diversifying its production locations and reducing its reliance on ocean freight, the company aims to build a more resilient and dynamic supply chain that can better navigate the challenges posed by geopolitical tensions and shipping constraints.
This trend toward onshoring is set to reshape global manufacturing. As geopolitical tensions persist, companies are likely to bolster domestic or U.S.-based production to secure supply chains against future global trade disruptions.
