We have seen many signs of re-shoring in our portfolio companies. Some of that trend is a function of China suppliers re-prioritizing their manufacturing focus towards high unit volumes where they can justify capital investment in productivity enhancing technologies. Niche manufacturers, like our fractional horsepower AC/DC motor business, have lower unit volumes and seem to be benefiting from the re-shoring of undesirable smaller volumes. The China supply chain miracle still exists, but increasingly is reliant on huge unit volumes where rising in country labor costs can be mitigated by capital investment. We have heard this from a number of lower middle market sources including several of our investors in the electrical supply field (small volume tools) and lower volume machined parts. So, we have taken some comfort in the re-shoring trend being a lasting foundation for the resurgence of domestic manufacturing.
E Pluribus Interruptous?
The unbelievable strength of the U.S. Dollar relative to almost every international manufacturing country has come as an abrupt change in the world order:
The magnitude of that appreciation makes you wonder whether the re-shoring trend will be interrupted.
I put that question to one of our investors who has recently retired after having spent more than 40 years as one of the leading U.S. consultants on the topic of worldwide manufacturing and a leading proponent of the renaissance of domestic manufacturing. His response is really interesting:
“I think the long-term trend for manufacturing in the U.S. is still positive, but will be negatively affected by the stronger dollar. That said, the best of the re-shoring initiatives are actually not about currency or even labor plays. The best are about advanced technology enabled manufacturing serving advanced customers (think printed electronics, advanced composite materials). Companies that are just playing a labor and currency arbitrage game are likely to go slow on re-shoring.”
In my opinion, the unknown risk is a currency war waged by increasingly debt-challenged or insolvent nations trying to jump start demand for products and reverse a deflationary stagnation that seems to be spreading from Japan to the EU. The safe haven for currencies that are losing their buying power is to convert to USD and invest in America. This means that the circle may tighten and the USD may continue to rise to a point where rest of the world products begin to compete with United States manufacturing.
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