The U.S. manufacturing sector has been facing significant challenges, including rising costs, supply chain disruptions, and geopolitical tensions for two decades. This year, these issues have been compounded by import tariff announcements and the resulting market uncertainty. Despite these challenges, there has been bipartisan momentum to strengthen supply chains and support U.S. manufacturing.
To address these issues, the Biden administration took several key actions, including Executive Orders 14005 and 14017 that help provide financial assistance to local manufacturers and ordered a comprehensive review of key supply chains to identify vulnerabilities and strengthen resilience. The CHIPS act was also passed during this administration, with the explicit goal of boosting domestic semiconductor manufacturing.
The Trump administration continues to prioritize domestic manufacturing, most notably by bolstering U.S. manufacturing through tariffs on imports to encourage demand by making imported goods less competitive. In July, the One Big Beautiful Bill Act (OBBBA) was passed that includes provisions for expensing research and development, allows 100% bonus depreciation on new equipment purchases, and extends benefits to manufacturers that existed in the Tax Cuts and Jobs Act (TCJA) passed in the first Trump administration.
Both administrations have taken steps to bring back and strengthen U.S.-based manufacturing, highlighting a shared commitment to improving the competitiveness of U.S. industry. A record $4T of new investments in U.S manufacturing have been announced this year.
However, despite these bipartisan efforts, there is one additional challenge, possibly the greatest of all: labor cost. The U.S. will be always handicapped by its higher standard of living—and hence its higher labor costs—when compared with other manufacturing powerhouses. For example, the average hourly wage for manufacturing workers in the U.S. ranges from $16 to $25, depending on the region. In contrast, the main manufacturing hubs in China, such as Guangdong, Jiangsu, and Zhejiang provinces, pay between $5 to $8 per hour, making U.S. labor over 200% more expensive against Chinese labor. This substantial difference in labor costs makes it difficult for U.S. businesses to succeed globally on labor alone. How can businesses compete in this context?
The Opportunity
The low-cost advantage in historically low-cost countries is not guaranteed to last forever. Over the past 15 years, countries like China, Vietnam, India, and Mexico have experienced significant economic growth, leading to rising labor rates. The GDP per capita growth rates in China (330%), Vietnam (360%), India (250%), and Mexico (165%) from 2009 to 2023 are accompanied by higher labor costs as these economies developed a middle class. This is fueled by factors such as increased foreign investment, industrialization, and improvements in education and infrastructure. Labor rates aside, overseas manufacturing has many indirect costs such as import tariffs and taxes, additional supply chain management costs (3PL or internal FTEs), and ocean freight, not to mention the impact of 5 weeks’ ocean transit on working capital and of supply chain uncertainty on delivery commitments. As a result, the cost advantage of manufacturing in these countries is diminishing, making it more attractive to consider reshoring or near-shoring manufacturing operations.
To help clarify the opportunity, Kroll has introduced the concept of Container Fill Time (CFT). CFT is defined as the time it takes to fill a Full Container Load (FCL), calculated by multiplying the product's cycle time by the number of products in a container (for example, the container dimensions divided by the product dimensions for lightweight products that volume-out). Quite simply, CFT identifies the labor hours incurred for each container’s worth of product. To factor in the logistics cost impact, Kroll used actual quotes for the shipments of a full container load (FCL) from the main ports of China to the main ports in the U.S., which generally range between $2,500 to $6,500. Our findings indicate that, using conservative assumptions, any product with a CFT of less than approximately four days is a viable candidate for reshoring to the U.S. This is because the savings in logistics-related costs offsets the additional costs of U.S. labor. With the implementation of heavier automation or if ocean freight costs are higher than assumed, the acceptable CFT can be much larger, providing ample opportunity for U.S. companies to invest in producing such products locally.
In terms of capital, private equity firms are estimated to have approximately $2 trillion in "dry powder" available for investment, and in the recent three years, the Kroll Operational Advisory Services team has worked on over 20 private deals in manufacturing. These have included molded plastic products (injection, reaction, rotational, extrusion, stretch-blow, and thermoforming), metallurgy (refining, casting), metal components for automotive and aerospace, food processing, and many other manufacturers. In most of the assessed facilities, Kroll has found between 50-80% open capacity. When accounting for the inherent inefficiencies of product changeovers and downtimes associated with the aging equipment found in these facilities, the available capacity is still 50-60% and represents significant “ops powder” available in the U.S. to private equity.
So, investors can seize existing “ops powder” to serve local markets for a wide variety of products that are currently imported. The immediate value created can then be extended by investing in new machinery and automation to grow revenues at an efficient cost base, i.e. increasing EBITDA, and to maintain cost competitiveness globally. For some, profits in the first year alone will fund automation. Pairing private equity dry powder with manufacturing ops powder can be leveraged not only to acquire assets but also to transform existing manufacturing facilities into state-of-the-art operations to support the growing economic future.
While the dynamics of public debate and data on the effectiveness of US-imposed tariffs on imports continue to play out, labor costs are relatively static. In particular, the CFT metric is a stable, underlying driver of the investment thesis for shifting manufacturing to the U.S. going forward for investors, industry management, and policymakers alike.
Conclusion
The reshoring of U.S. manufacturing and its supply chains, especially given the multiplying tailwinds of U.S. trade policy, will create significant domestic opportunity. Since July of this year, Kroll has experienced both U.S. and foreign-based clients making investment in the U.S., specifically purchasing U.S. product manufacturing capacity to provide local supply. These clients and others are taking the same actions to reshore:
- Determine the U.S. market growth from analysis of the tariff-induced country-to-country trade negotiations.
- Calculate Container Fill Time (CFT) to identify specific products and their manufacturers.
- Deploy investor dry powder and engage U.S. manufacturing capacity ‘ops powder’ in deals to produce immediate economic value.
- Recapitalize equipment and implement automation to extend the long-term value.
Investors can continue to be vigilant of the long-term U.S. trade rebalancing from the sidelines yet simultaneously play on the field today with selective, CFT metric-driven investments and generate returns.
How Kroll Can Help
Kroll Operational Advisory Services increases company performance in transaction, turnaround, and transformation situations. We advise public corporates, private equity, and their portfolio companies on operational strategy, execution, and value creation from sales growth, cost savings, process improvement, in/outsourcing, and integration to help our clients Stay Ahead of competitors.
We Are Hands-on Operators
- Team immerses in the manufacturing shop floor operations, understands the operational implications of the product from our engineering backgrounds, and frequently negotiates vendor and commercial strategies to achieve EBITDA growth.
We Prioritize Pragmatics
- Our approach is to field a focused team that prioritizes analysis on the largest value creation opportunities and applies practical realities of implementation to establish realistic EBITDA and operational KPI targets. For post-deal integration, we often fulfill an interim COO role to accelerate results for the benefit of all stakeholders.
We Are Commercially Driven
- Without exception, our pre-deal diligences find substantial EBITDA opportunity and, in addition to this, our post-deal execution yields cash from customer transition agreements, fixed asset sales, and opportunistic cash opportunities. Kroll brings operational business instinct, data analytics where insight is absent, and always a sense of urgency.
Kroll Operational Advisory Services takes pride in earning the trust of our clients, and we are confident in our ability to find, create, and deliver significant value in every engagement. It is our privilege to help our clients Stay Ahead with Kroll.
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