From microchips to canola oil, manufacturers want to build factories in North America

Resiliency

The COVID-19 pandemic showed society just how dependent we are on a delicate global supply chain. Manufacturers “optimized” the supply chain to its limit but didn’t sufficiently account for global crises. We learned that disruptions such as extreme weather, conflict, or a deadly virus could bring it to a shuddering halt. We felt it when the shortage of semiconductors disrupted automobile manufacturing and pushed up vehicle prices. Thus, manufacturers are increasingly looking for simpler supply chains. For many that means building factories to meet customer demand without crossing oceans or international borders.

Climate change awareness

Every physical product made overseas and destined for North America gets put on a ship. Those ships use oil and create a carbon footprint. To reduce that footprint, companies want to shrink the gap between the consumer and factory. If they can make it closer to its destination, they add less to the carbon bill for that product. Lowering their carbon appetite helps meet government regulations, vendor requirements, and responds to shareholders’ interests by minimizing risk.

Costs

Shipping and logistics are more fragile than we realized. They have become far more expensive. These rising costs, along with volatile oil prices, hit manufacturers in their bottom line.

Meanwhile the cost of labor in many developing countries is rising, making offshoring less enticing. This also means increased demand in emerging markets. Many companies aren’t planning to move existing factories back to North America, but rather add new net capacity there. Companies want to build factories in their consumers’ markets. They want both a factory in North America to serve that market and a factory in Asia to make products for consumers there. Expect to see production of everything from ibuprofen to food staples returning to North America (toilet paper is already domestically produced, by the way).

Vertical integration cycle

For years, there was a trend toward brands using an original equipment manufacturer and putting their sticker on a product someone else produced. Brands pushed various aspects of production out of their building to subcontractors. But to paraphrase an industry axiom, “The only way to get your suppliers to care as much about your product as you do is to (over) pay them to or buy them outright.” Right now, the cycle is swinging back toward making things in-house to achieve quality control and simplify the supply chain. Companies want to ensure they can continue production in the face of climate shocks or shortages. Many want to do more under one roof.

Legislation

Many policymakers have come around to seeing robust manufacturing as key to a resilient economy, with positive economic and social effects. Recent analysis by the McKinsey Global Institute suggests that “transforming the US manufacturing sector could boost GDP by $275 billion to $460 billion while adding up to 1.5 million jobs.” Governments are writing laws to promote more domestic manufacturing. The United States passed the CHIPS law to boost domestic manufacture of microchips and established the Supply Chain Disruptions Task Force to strengthen the supply chain. Plus, the Inflation Reduction Act boosts domestic manufacturing.

The government’s efforts to build at home are already bearing fruit. The CHIPS funding encouraged Intel to break ground on a $20 billion factory in Ohio. While Ford, GM, and others have announced new US plants for the battery cells required in electric vehicles.

Canada promotes domestic manufacturing through a wide range of grants and loans to support strategic growth projects. Groups such as Canadian Manufacturers and Exporters and Ontario 360 are encouraging Canada to do more to promote manufacturing during economic recovery.

What will these new factories look like?

• Highly automated: Production operations are coming back to North America, but there will be fewer humans in the factory than before. Highly capable digital technology and automation enables manufacturers to manufacture domestically at a lower cost. Automation extends beyond manufacturing to suppliers, material handling, inventory, shipping, warehousing, and logistics. In response, we're going to see more digital connectivity between factories and suppliers. Expect an increasing level of digital automation, metrics, and control in the factory. This will include artificial intelligence systems that can anticipate and coordinate factory inputs to meet demand.
• Predictive and sensor-equipped: In the past, manufacturing relied on materials requisitions. For example, a manufacturer sends a request for X number of parts, and then another request for the following day based on the need for the finished product. Now, that work is automated. Manufacturers are also using technology to control quality, to ensure the equipment's running well and predict its service. Most factories are not yet highly sensor-equipped smart buildings themselves. But soon we will see more controllers and sensors on the assembly line that can detect or predict failing components.
• Highly connected and secure: The highly connected factory introduces new complexity into manufacturing. Cyber security is a new issue that manufacturers need to address to maintain their resiliency. Nothing is fully safe from cyber-attacks.
• Power hungry: When factories have huge power demand spikes that the system can't handle, manufacturers pay a penalty for their excess energy use. They will require more power for the robotics and conveyor belts in the automated factory. They need control to manage that power. The goal is predictable power usage. Many want to be fully electric as part of a decarbonization program, which also drives up the power requirements. Manufacturers, especially those in energy-intensive heavy-industrial sectors, will need to find ways to innovate in their switch to low-carbon sources.
• Often repurposed: The high cost of commodities and construction makes building reuse for factories attractive. In evaluating a building for reuse, manufacturers are balancing priorities of location, size, orientation, and adaptability. Look beyond the electrical and mechanical issues, and you’ll find that the structures and sizes of older buildings are often good. They have good bones. Purpose-built buildings, however, may not be flexible enough for designers to repurpose as industrial facilities. With suitable factory sites in short supply, we will see a mix of building reuse and replacements to meet demand.