Inflation Reduction Act tax credit incentives and uncertainties about global supply chains have led many businesses that offshored operations over the last few decades to bring them back to North America. Is this the right call for your business?
It shouldn’t surprise anyone who follows the cyclical nature of business trends that the offshoring tides that swept so many U.S.-based manufacturing operations overseas to cheaper labor and regulatory markets in Asia and other parts of the world over the last few decades have begun to recede.
That trend has started to give way to “reshoring” (a business bringing its operations back to its home country, and for purposes of this article, we’re talking specifically about U.S. taxpayers bringing overseas operations back to the U.S.) and “nearshoring” (a business bringing operations closer to its destination market, but not necessarily back into its home country) operations so that much more of a manufacturer’s processes are performed closer to the main destination market. These moves can shorten and improve the reliability of a business’ inbound supply chain, reduce business risk, and increase speed-to-market and reliability in delivering finished products to customers.
Our goal with this article is to help readers understand:
The causes driving many businesses to evaluate operations and choose to nearshore or reshore them.
The added incentives for U.S. taxpayers under the Inflation Reduction Act to consider reshoring operations into the states instead of more broadly nearshoring them to North America.
The supply chain factors that should be considered once it becomes clear that nearshoring is the right choice.
The support that a business will need from internal and external resources to evaluate the many diverse options available and determine the optimal choice for its specific needs.
What flipped the incentives from offshore-favored to nearshore-advantaged?
Recent news has been chock-full of reasons why U.S.-based companies have been driven to rethink their previous commitments to offshoring. The first issue that forced businesses to reevaluate commitments in Asia was the trade friction between the United States and China that began in 2018 and has eventually escalated into a trade war. A U.S. tariff of 25% was imposed on many goods brought in from China. Additional tariffs have been recently imposed on strategic goods, up to 100% on Chinese EVs, for example. In addition to this sudden costly change in circumstances affecting operations in China, a host of other changes in the international landscape made overseas manufacturing riskier and less cost effective, including:
Black swan events like the COVID-19 pandemic or microchip supply disruptions due to the April 2024 earthquake in Taiwan.
Supply chain disruptions in shipping from Asia, from weather instability driving increased volatility and shipping costs to shortages of shipping containers and congestion in ports.
Geopolitical instability, such as intense conflicts between Ukraine and Russia and Israel and Hamas and long-simmering disputes that could erupt anytime between adversaries like China and Taiwan or North and South Korea.
Recent news has been chock-full of reasons why U.S.-based companies have been driven to rethink their previous commitments to offshoring.
In short, companies that ran the numbers and determined that offshoring made financial sense based on costs in previous years have had to factor in a risk/benefit analysis based on increased uncertainties associated with overseas production that have changed the calculation.
On the positive side, provisions in the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act have provided a variety of incentives that support U.S.-based businesses looking to reshore their processes back into the states.
Significant incentives in Inflation Reduction Act tax credits
The IRA included several provisions aimed to entice U.S. taxpayers that had offshored manufacturing of particularly desirable products to consider reshoring those operations to the United States. Section 45X, the Advanced Manufacturing Tax Credit, supports U.S.-based production of eligible clean energy components within the supply chain of solar and wind energy, batteries, inverters, and critical minerals. To qualify for the credit, the production must occur in the United States, and the components must be sold to an unrelated party (with some exceptions).
Many companies are relying on the Advanced Manufacturing Production (45X) Credit benefit to fund the construction of new facilities or the expansion of existing ones within the United States. The credit also allows a form of “double-dipping,” in which taxpayers that claim the credit on their tax return aren’t precluded from applying for federal grants to further fund the construction or expansion of their facilities in an attempt to strengthen the domestic supply chain.
Many companies are relying on the Advanced Manufacturing Production (45X) Credit benefit to fund the construction of new facilities or the expansion of existing ones within the United States.
The 45X credit also provides more flexibility in terms of monetization options. For one thing, it’s a “preferred credit” under the tax law, which gives for-profit entities the option to make an elective payment (often referred to as direct-pay) election. That election results in the government issuing a check to the taxpayer for the credit amount, even in the absence of a tax liability.
Any taxpayers investing heavily in facilities that would qualify for the credit are likely going to have such significant depreciation deductions that they may not be able to utilize the 45X credit as a general business credit (the second monetization option) for several years. Those who have exhausted their eligibility for the direct-pay option have an additional option of selling their credit to another taxpayer and getting cash in-hand while the buyer gets the benefit of a dollar-for-dollar reduction in their tax liability under the general business credit.
Beyond the green energy component manufacturing incentives in the 45X Advanced Manufacturing Production Credit, reshoring U.S. businesses can also benefit under the Investment Tax Credit (ITC) for clean energy-producing property like solar panels placed in service to support their operations, with additional incentives if those energy-producing components meet certain made-in-the-USA requirements. Those businesses looking to purchase company vehicles can also benefit from commercial clean energy vehicle credits available for vehicles placed in service after Dec. 31, 2022. There are restrictions in this area that critical minerals for these components must be extracted in the United States or in countries that have free trade agreements with the United States, and minerals mined or refined in countries that are considered “foreign entities of concern” are expressly prohibited starting in 2024.
The United States is accelerating its shift toward electric vehicles (EVs) and renewable energy, driving a need for significant capital among manufacturers. To support this transition, the government has introduced various funding opportunities, including the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program and Title 17 Clean Energy Financing Loan Program. These initiatives, bolstered by the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, offer loans and grants to companies retooling manufacturing facilities, developing battery supply chains, and enhancing clean energy infrastructure. The ATVM program, with $40 billion allocated, provides loans for projects that improve vehicle fuel efficiency and vehicle electrification, while Title 17, with $300 billion in funds, supports clean energy projects. Additionally, the battery processing grant under the Infrastructure Act allocates $7 billion to bolster battery materials and processing in the United States. Despite the significant funding available, many businesses are unaware of these opportunities, underscoring the importance of understanding and leveraging these resources for developing a North American manufacturing base for these industries.
The bigger picture: Rebuilding supply chains to support reshoring or nearshoring
While U.S. tax credits and other incentives will have a significant impact on calculating the optimal location for a nearshoring decision, the business also needs to complete a “make-or-buy” analysis that will help to determine exactly how much of a manufacturing process can effectively be moved closer to the end consumer. In many cases, an executive team might evaluate the available information and determine that something less than 100% of the process should come back across the ocean, with the rest remaining farther overseas. Typically, the more a business changes its operations in a process like this, the more expensive the process becomes. The company’s incentive in this area will often be, “What’s the least we can do to maximize the benefits available from reshoring and nearshoring?”
Typically, the more a business changes its operations in a process like this, the more expensive the process becomes.
Strategically speaking, the evaluation involves significant risk management analysis. The business needs a clear vision of what the nearshored operations will look like once they are up and running, and that evaluation should include:
Location selection based on proximity to suppliers and customers.
Facility layout optimization requirements that help a business determine if it needs “clean sheet” new construction to deliver optimal flow of materials through a facility or if it can operate through “monuments,” which are structural components of an existing building that can’t be moved.
Review of equipment requirements, balancing the cost and risks of reshoring the overseas equipment against the business case for installing new equipment in the new onshore location.
Facility setup and equipment qualification processes that effectively translate the plans for new plant and equipment into reality.
Translation of quality management systems from the previous facilities to the new ones. How does the business adapt the quality management processes from the previous facility into the new concept? The business will only get one shot at starting up right, and if those that get it wrong will likely lose customers and revenue. The right quality management system will help to manage the risks at this critical stage.
Inventory planning with product bank builds and/or redundant production.
Start of production in the new facility.
Once the evaluation has given leadership a clear picture of what operations will be nearshored and what the facility will look like, executives need to construct a nearshored supply chain to support the new location. There’s little value in moving everything else closer to the end market if the business doesn’t address the risk that would arise from using overseas suppliers. That process should include:
Creation of a sourcing strategy and plan for executing on that strategy.
Identification and qualification of potential suppliers.
Inbound supply and outbound customer shipment supply chain design, often with the assistance of a third-party logistics service.
The depth and breadth of expertise needed across multiple disciplines to generate an effective nearshoring analysis will rarely exist in one company. The analysis will need to cover a wide variety of real estate, tax, supply chain, operations, and cross-border manufacturing issues as discussed in the checklist below.
The depth and breadth of expertise needed across multiple disciplines to generate an effective nearshoring analysis will rarely exist in one company.
Key site selection and real estate considerations for nearshoring
When it comes to identifying a location in North America for reshoring and standing up a new facility, time is a critical factor. Few consultants will offer under one roof all the diverse resources and practical experience needed to provide insightful advice on all of the criteria discussed above.
In order to plan and execute a cross-ocean move that minimizes the disruptions that set many businesses back, your business will need to assemble a team of real estate, tax, and advisory professionals that can help to evaluate a wide variety of site selection nuances, such as:
Analysis of greenfield (new construction) versus brownfield (existing building) sites. This is one of the most critical components of the evaluation, as each option can be fraught with hidden costs and challenges that can multiply the original estimates of cost and time to complete.
Labor analysis. Should an employer choose a location with a strong population of potential employee candidates, or is the expectation that, “If we build it, they will come?” Either of these is a legitimate strategy, but the choice needs to be clear upfront. Workforce analysis by region can factor the availability of human resources into the plan from the start.
State and local tax reviews. Federal tax incentives for nearshoring were discussed above, but each state and the municipalities therein may have additional rules that could have a significant impact, positive or negative, on a location decision.
Short- versus long-term nearshoring goals. Does the business plan to make this facility a first step toward greater nearshoring in the future, or is the expectation that this project will be the sum total of its nearshoring plans? Executives need to work with a team of advisors that can help them see the advantages in each option and help them understand how to execute this part of the strategy in a way that supports longer-term goals.
Logistical considerations. What kind of infrastructure is available to support the new operations in each community under consideration? This evaluation should cover everything, from easy access of distribution options that support supply chains to utilities that supply production needs for things as basic as water and electricity, and even preferred school systems that provide a steady stream of future quality employees as well as make the area more attractive to potential employees looking to raise children.
The reasons to nearshore continue to grow
Several upcoming events are already adding uncertainty to the world outlook that can make nearshoring an even better choice for businesses. Already in 2024, we’ve seen a historic election in Mexico and tariffs imposed by the United States on specific industries and products. Events that can be thought of as “known uncertainties” in the months and years ahead include:
The U.S. presidential election in November 2024.
Canadian elections in October 2025.
Review of the United States-Mexico-Canada (USMCA) agreement in 2026.
And that doesn’t even begin to cover the unpredictable “black swan” uncertainties that could show up on tomorrow’s news without warning, like a ship striking a bridge or running aground in a key waterway that chokes off a significant link in the supply chain, or an earthquake that could indefinitely shut down production in a key geographic area.
Interested in bringing your operations closer to home?
