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Should Manufacturers Use U.S. Supply Chain Partners? Pros & Cons

Posted by Concannon Miller on Fri, Jan 8, 2021

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Should Manufacturers Use U.S. Supply Chain Partners? Pros & ConsThe manufacturing industry's dependence on foreign suppliers, especially those in China, has caused concerns for many years. But the COVID-19 pandemic has put a spotlight on this issue, forcing some manufacturers to rethink their offshore business arrangements.

Would your business be better off switching to U.S. supply chain partners? Here's some important information to consider.

Foreign Threats

Manufacturers may have concerns related to foreign business arrangements. For starters, the potential for intellectual property theft and cybersecurity breaches involving China and other foreign countries has presented major risks in recent years.

In addition, during the COVID-19 pandemic, many companies' supply chains were disrupted as China struggled to address pandemic risks and was forced to suspend or severely limit operations. Simply put, Chinese suppliers have been unable to meet global demand for consumer goods, industrial needs and much-needed medical equipment.

In light of these issues, so-called "reshoring" initiatives — that is, plans to bring jobs, customer service and supply agreements back to the United States — have become economically and politically expedient. However, restoring America's place in the global pecking order is easier said than done.

READ MORE: Should You Consider New Niches: Ways Manufacturers Can Pivot

Three Challenges

To move successfully to domestic supply chains, U.S. manufacturers face three major obstacles:

Cost Efficiency: Despite recent inroads, it's still generally cheaper to produce goods in China and other foreign countries. Cost remains a key factor and could deter reshoring efforts, especially if the United States experiences inflation and labor costs increase in 2021. U.S. manufacturers are seeking a lifeline from the federal government through subsidies, tax breaks and other incentives that could help defray higher costs for domestic production.

Skills Gap: A recent study conducted in association with the National Association of Manufacturers found that 62% of U.S. manufacturing companies currently report a worker shortage. That problem is expected to worsen as older, more-experienced workers retire without younger workers to replace them. To help bridge the gap, some manufacturers are implementing training programs that target "second-chancers," such as rehabilitated felons and individuals with prior drug-related problems.

However, the skills gap trend also can be attributed to a systematic problem: U.S. educational institutions have failed to emphasize opportunities in manufacturing, and they perpetuate a perception that manufacturing is a dead-end field. To remedy this situation, school districts need to introduce and support science, technology, engineering and mathematics (STEM) programs, starting in elementary schools. Additionally, high schools, vocational programs and colleges should partner with the manufacturing sector to promote the industry's use of advanced technology and growth opportunities.       

Infrastructure Concerns: Over the last 50 years, the United States has shifted from a manufacturing economy to a service economy, and its infrastructure has been largely neglected. This deteriorating infrastructure puts domestic manufacturers at a disadvantage globally. Significant infrastructure investment — including rebuilding road, bridges, railways and power facilities — is needed to get America back on track. Federal and state governments must take on this challenge.

READ MORE: 5 Ideas for Reskilling Your Manufacturing Workforce Amid the COVID-19 Crisis

Biden's Plan

"Made in America" is expected to be more than just a catchphrase, starting in 2021. Fortunately, President-Elect Joe Biden has proposed the following federal tax law changes to encourage manufacturers to reshore their operations:

  • A 10% tax credit for investments designed to create U.S. manufacturing jobs or modernize U.S.-based manufacturing facilities,
  • A 30.8% tax penalty on profits for companies that offshore production while selling products back to the United States,
  • Increased tax incentives for domestic R&D, and
  • Higher taxes on foreign profits of U.S. companies.

Biden would like to allocate substantial financial resources to his Made-in-America effort. For example, he's proposed resurrecting federally funded institutes created during the Obama administration for applied research in manufacturing. And he's expected to push for requirements for the U.S. government to "buy American."

However, the president can't enact these changes alone. So Biden's plans will require buy-in from a divided Congress.

A Customized Approach

Every supply chain has unique threats and opportunities. Consult us and your other professional advisors to assess your position in today's uncertain marketplace and help determine what changes you should consider making to your business plan in 2021 and beyond.

© 2021

Topics: Manufacturing

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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