Manufacturing in the Age of Deglobalization

Historically, the manufacturing sector has been impacted significantly by economic contractions. For example, during the 1981-82 recession — which was triggered (not unlike today’s conditions) by the extremely tight monetary policy of the Volcker 70’s — manufacturers suffered 90% of job losses during this period of high (11%) unemployment. However, despite today’s difficult economic circumstances, we believe U.S. manufacturing is likely to experience a period of meaningful resurgence and growth in the coming decade. Deglobalization is a heavy term and a return to complete protectionism is unlikely to benefit any economy in the long run. Many nations have thrived in an increasingly globalized world: over the last decade, cross-border flows of goods, services, finance, people, and data increased world GDP by roughly 10%. That said, the harsh lessons of the last half-decade, and an increasingly uncertain future-looking global geopolitical landscape, have shown the U.S. that in order to a) protect our national interests, b) ensure supply chain resiliency and access to critical goods and the technologies that now play a key role in almost every aspect of our lives and, c) to lower inflation in the medium/long run, the U.S. must reshore, “nearshore”, or “friendshore“ trillions of dollars of manufacturing in the coming years. The opportunity for U.S. manufacturers is massive Currently, $22.4 trillion of goods and services are traded across borders annually, constituting almost a third of global GDP. McKinsey Global Institute (MGI) research found that every major region is dependent on others for critical manufactured goods or resources, including about 30% of goods consumed in the U.S.

As of April 2022, 81% of global supply chain leaders surveyed said they initiated dual sourcing of raw materials — up an astounding 26% from the previous year — and more than $200 billion has been committed to new manufacturing investment projects over the past eight months. An effective transformation of the U.S. manufacturing sector could boost GDP by $275 billion to $460 billion, while adding up to 1.5 million jobs.

Alongside this corporate reckoning, economic resilience and supply chain diversification have become matters of national priority as proven by the $369 Billion USD Inflation Reduction Act, the $53 Billion USD CHIPS and Science Act, and the new Foreign Direct Product Rules imposed on China in October 2022.

Bringing manufacturing home comes with challenges Investment dollars and fiscal stimulus are piling on to the reshoring bandwagon, but the shared appetite to reshore is far greater than our actual capacity to do so. U.S. manufacturers face multiple structural issues preventing them from satisfying the spike in demand, including:

1. Persistent comparative wage differentials: U.S. wages are 2-3x per hour more than the wages of manufacturing workers in Asia. To afford U.S. labor and keep prices competitive, manufacturers need workers to produce more than 2-5x current output 2. A massive gap in skilled labor: There are almost 2 million unfulfilled manufacturing roles in the U.S. today. And, to further compound the labor gap, a significant portion of the skilled manufacturing workforce, including welders, CNC operators, and other machinists, are retiring every year. 3. We lack the know-how and economic ecosystems to manufacture for today’s supply chains: Asia has incredible regional economies of scale for subcomponent and parts suppliers, in addition to a workforce highly skilled in machine operation and assembly. European and Asian supply chains are proximate and closely integrated for just in time sequencing, and only 18% of goods traded these days is based on labor-cost arbitrage.

How to make U.S. onshoring a reality If U.S. input and wage costs are higher and our manufacturing labor capacity is insufficient to fulfill demand, we need to radically shift the efficiency of how we manufacture to achieve the goal of reshoring without skyrocketing the cost of goods. Emulating the manufacturing ecosystems of other geographies will not work. The U.S. needs to leverage innovative tools and new strategies to enable high-margin, efficient, and effective supply chains to exist in North America. Below are five key technologies —illustrated through Eclipse portfolio case studies — that we believe are not only increasingly ready for maturity, but necessary to win our battle to reshore: 1. Microfactories and Manufacturing Automation Advancing manufacturing automation has been a catalyst for many U.S. inflection points, including the large press that helped the U.S. rapidly forge new key aircraft in WWII and the many uses of the mass-producible Ford Model T in WWI. Simply put, efficiency gains in manufacturing assembly approaches and processes can have game-changing impacts on a country’s economic growth and geopolitical importance. Fully automated manufacturing lines that leverage cloud computing, low-cost robotics, and low-code/no-code programming are transforming the U.S. manufacturing landscape. Eclipse portfolio company Bright Machines is an example of how applying machine learning, computer vision, and cloud architecture to automation can bring increased flexibility, resiliency, and transparency to manufacturing. Bright Machine’s approach to manufacturing automation is proven to improve factory throughput by 70%, reduce defects by 60%, and increase end-to-end operational efficiency.

2. Artificial Intelligence and Computer Vision In 2019, there were more than 2.8M workplace injuries (this is prior to the pandemic and this number is not inclusive of COVID-related illness). While there are many ways computer vision and AI can play a high-impact role in manufacturing onshoring, one critical application of deep learning focuses on industrial environment safety and efficiency. VoxelAI leverages existing camera infrastructure to run advanced computer vision algorithms that detect hazardous workplace incidents and leading indicators of future accidents or injuries. From poor ergonomics to dangerous vehicle handling behaviors, Voxel’s system drives a 65% reduction in injuries, 80% reduction in lost time, and a 20% increase in operational efficiency for the large industrials they serve. Although in its early days, machine vision for manual inspection and controls is also under development.

3. Additive Manufacturingand Reshoring Our Critical Supply Chains Asia’s dominance as the manufacturing workshop of the world came not only from its proficiency in manufacturing assembly, but also in the incredible ecosystem of efficient upstream supply chain access to materials, components, and other critical inputs. To effectively reshore, the U.S. must not only reshore assembly capacity, but also create an effective upstream supply base of critical parts. Metal parts manufacturing — especially for finished or high-precision steel and titanium parts — is one of the most costly supply chains to reshore, as Asia holds the world’s largest supply of CNC machines and other metal manufacturing equipment like extruders, die-cutters, and stamps. To reshore this essential part of the chain without reshoring the environmental challenges and radical capital expenditures involved in metals manufacturing, the U.S. requires innovative technology-driven solutions.

Additive manufacturing is no longer just a novelty for prototyping and low volume designs. Technology has evolved significantly, and major brands are beginning to adopt leading edge solutions. Metals additive manufacturing is one of the most challenging types of additives to invent, yet it is crucial for onshoring in the U.S. VulcanForms’ next generation manufacturing facilities use breakthrough 100-kilowatt laser additive manufacturing technology, automated machining, integrated robotics, and a proprietary digital thread to manufacture everything from 3-D printed medical implants, to cruise missile engines, to heat exchangers and tire molds. Leveraging advanced additive manufacturing for parts manufacturing is key to any near-shored supply chain strategy.

4. Machine Condition Monitoring Ten to 15% of losses in manufacturing productivity are due to mechanical issues. Unplanned downtime stunts progress and scheduled maintenance has historically been an inefficient, but necessary evil. Today’s machine monitoring solutions not only offer constant tracking and alerting across most equipment types, but also predictive maintenance capabilities and machine learning based on large datasets across many customers and machine types. Augury’s Machine Health platform enables large manufacturing operations, including Frito-Lay, Colgate-Palmolive, Hershey’s, and Danone to lower costs, reduce downtime, and increase supply chain resilience through guaranteed machine diagnostics that pair AI with tried-and-true predictive maintenance methodologies. Augury’s sensors capture and transmit data to the Augury platform 24/7, generating prescriptive diagnostics and actionable insights for their customers’ machine health.

5. Manufacturing Upskilling The U.S. is projected to have 2.1M unfulfilled manufacturing jobs by 2030. Manufacturing has a problem attracting new, young, and diverse talent pools despite tremendous demand. While great upskilling programs like GUILD exist in other sectors, industrials have structural challenges that prevent these solutions from having their full impact. Eclipse portfolio company Forge is building and powering the next generation of skilled trades workers by providing an entirely new type of training — one where tradespeople are paid to learn and given next-generation software and tools to excel in their craft. Through this unique combination of training and technology, Forge is providing a more accessible career path for those who want to thrive in a career working with their hands and ultimately, increasing the number of tradespeople in our country.

Reshoring is no longer an option — we must take our efforts seriously to bring back critical industries like manufacturing to the U.S. for the future of our economy and national security. The five key manufacturing and industrial technologies outlined are beginning to fundamentally shift the landscape for U.S. reshoring, but they are only a piece of the puzzle. There is much more work to be done and ample opportunities for ambitious founders and their teams to help the U.S. not only take back our physical industries, but innovate for a more efficient, resilient, and profitable future. Eclipse has invested and built full-stack companies powering the Industrial Evolution for almost a decade and we’re excited to continue to partner with founders with the vision and grit to help lead the charge on the U.S.’ reshoring efforts. Let’s get to work If you’re a founder or CEO passionate about bringing rapid innovation to physical industries, I’d love to hear from you: aidan@eclipse.vc.

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