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December 6, 2023 The Battle to Reshore US Supply Chains Starts in China

US businesses can take advantage of the R&D credit to onshore production & minimize the risks associated with long and complex supply chains.

By Myron Moser and Dhaval Jadav

The U.S. has historically been one of the most dominant manufacturing locations in the world. But in recent years, we have seen many American companies choose to offshore their manufacturing activities to China, which touts a large workforce and dramatically lower operation costs.

America’s supply chain operations have continued to move offshore, particularly in the aftermath of the COVID-19 pandemic, which showcased U.S. vulnerabilities as China’s supply chains remained relatively stable. In fact, the U.S. International Trade Commission has found that China is the single largest offshoring destination for U.S. companies.

On paper and with profit-maximizing objectives, this isn’t necessarily surprising news. But, with targeted incentives and the amplification of existing benefits, the U.S. can (and should) push American businesses that are now overseas to reshore their manufacturing activities, especially as China begins to experience increased manufacturing wages and a deteriorating workforce. 

The building blocks to successful reshoring

In terms of the basic benefits, reshoring operations will lead to minimized supply chain risks, increased quality control, and reduced lead times. Still, in the end, money talks, and with American manufacturing costs not being competitive, businesses will need monetary incentives to keep their businesses here.

To that end, Congress should consider expanding tax or other business incentives that reward companies that choose the U.S. as their primary center of manufacturing operations. For example, the Reshoring American Manufacturing Act of 2020, or the RAM Act, allowed for businesses to claim a tax credit of up to $25 million in one tax year for the costs of eligible reshoring expenses, including the transportation of equipment from China to the U.S.

Notably, other incentives like the Research and Development Tax Credit (R&D) have existed for decades as a way to reward businesses for their innovation efforts aimed at improving products and processes – a shoe-in for most manufacturing companies.

However, a common misconception surrounding the R&D tax credit is that it is only available to researchers and scientists. For most companies that are innovating in one or another, the tax code likely allows them to expense R&D costs and claim a tax credit for certain R&D expenses. However, too many businesses in the manufacturing sector prematurely disqualify themselves from claiming this additional financial support.

Determining eligibility

As prescribed in 26 U.S.C. § 41, the R&D credit may be claimed by taxpaying businesses that develop, design, or improve products, processes, formulas, or software. For manufacturers looking to leverage this resource for their reshoring efforts, the first step is for businesses to work closely with their advisors and CPAs to scrutinize daily activities and determine if the innovation they are pursuing qualifies them for available tax incentives like R&D.

This scrutiny includes:

  • Documenting all potential R&D activities (project lists, notes, expense ledgers, etc.)
  • Gathering employee testimony
  • Keeping track of R&D wages, as well as contractor, supply and computer costs

As long as activity is clearly documented, a variety of business innovation within the manufacturing industry can qualify. Some examples include:

  • Introducing new and/or improved efficiencies to a wide range of manufacturing operations – a qualification where reshoring efforts would likely fall
  • Implementing and designing automation solutions
  • Integrating new supply chain technology

Especially with innovation happening so rapidly, Congress needs to make sure businesses know that emerging technologies can form the basis of their R&D claim.

For example, as AI, machine learning, and automation become stronger forces across the globe, companies that are working to integrate these tools into their business operations and reshoring plans will likely qualify for R&D incentives. Not only will this support the companies themselves, but it will support America’s manufacturing productivity and competitiveness in the global marketplace.

Looking beyond incentives

Beyond providing existing tax incentives, the U.S. government should also help businesses reshore by eliminating workforce roadblocks. As technical labor is still in short supply here in the U.S., Congress should consider simplifying, expediting, or prioritizing immigration visas for employees of companies who are looking to bring in foreign labor. This simplified process should apply from the work visa stage through the worker obtaining citizenship status as an American, assuming the employee maintains their work status.

This method has been introduced within in the agriculture industry with the Farm Workforce Modernization Act which would provide undocumented farmworkers with a path to legal immigration status and citizenship. This solution, meant to combat a severe labor shortage, can and should be considered in the manufacturing space as well.

Doing so will create a win-win scenario – an increased labor force in the U.S. while pulling operations away from competitors abroad.

Immediate action

As of May, a poll found that 82% of U.S. business leaders are either already reshoring or planning to reshore their overseas operations. This is a dramatic increase, and trend in the right direction, from the 55% that was reported in January.

In the near term, the U.S. government should work to not just offer bolstered incentives for reshoring operations, but highlight the risks of offshoring like the costs of shipping and import duties, as well as what some have called the “hidden cost” of businesses over-ordering product overseas to protect against inventory pitfalls and longer lead times. We’ve seen this before with prominent U.S. companies like Deere & Company, which last year invested $29.8 million to begin manufacturing harvesters in America instead of China.

John Deere crafts many of its tractor models in the US across Georgia, Iowa, and Tennessee. [Source: MachineFinder]
John Deere crafts many of its tractor models in the US across Georgia, Iowa, and Tennessee. [Source: MachineFinder]

In most cases, the benefits of reshoring can outweigh the costs. Congress must act to strengthen all resources that will spur all American businesses to come back home, and businesses in the manufacturing sector need to take advantage of key economic incentives they have likely overlooked thus far.

myron moser hartfiel automation
Myron Moser

Myron Moser is Chairman Emeritus at Hartfiel Automation and a member of alliantgroup’s Strategic Advisory Board.

dhaval jadav alliantgroup
Dhaval Jadav

Dhaval Jadav is the founder and Chief Executive Officer of alliantgroup, a consulting and management engineering firm in Houston, Texas.

 

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