U.S. companies prefer to load up on inventories as opposed to reshoring – report

Covid-19 pandemic has definitively reshaped the supply chain dynamics, and the popular opinion is that major American corporations may build factories in the U.S. to avoid supply disruptions. However, that is not the case yet, as per a new report by Goldman Sachs.

Reshoring doesn’t seem to have taken off in a big way and construction of new factories haven’t accelerated either, according to the report.

“Imports are still growing faster than domestic manufacturing output. Diversification of supply chains appears to be further along, and inventory overstocking is the strategy that’s most clearly underway,” said Goldman Sachs.

Upon scanning the recent earnings call transcripts published by U.S. companies, the investment bank’s research team found there is a jump in the number of companies that plan to permanently increase inventories to protect against production disruptions, particularly for durable goods.

The investment bank has also tried to answer the question as to why contrary to popular opinion, reshoring hasn’t taken off in the U.S.?

The bank’s research states factors that had made offshoring popular -- like lower labor costs and lower inflation -- are still relevant.

“Despite the risks of foreign shocks, it may not be economical or even feasible to be the first company to take on higher production costs as an insurance policy against future crises. Some investors worry that efforts to make supply chains more resilient could increase inflation pressures,” according to Goldman Sachs.

The bank also cautioned that it is too soon to come to a definite conclusion. Their study also showed that even though reshoring of production is the most expensive response to supply chain risks, U.S. stocks exposed to reshoring have outperformed those linked to offshoring -- a sign the market expects manufacturing to pick up.

One of the reasons reshoring hasn’t yet gathered full steam because it is contributing less to inflation than other factors like an overheated job market.  

“Indeed, the potentially inflationary impact of strengthening supply chain resilience is the main reason why many companies in competitive markets might find it difficult to take these steps,” according to Goldman Sachs Research.

Reference:

https://www.goldmansachs.com/insights/pages/are-us-companies-actually-reshoring-their-supply-chains.h