Transcript
A (0:00)
Welcome to Thoughts on the Market. I'm Michelle weaver, Morgan Stanley's U.S. thematic and equity strategist.
B (0:06)
I'm Chris Snyder, U.S. multi industry analyst.
A (0:09)
Today, will 2026 be the year of U.S. manufacturing's transformation? It's Tuesday, January 13th at 10:00am in New York. U.S. reshoring has been an important component of our multipolar world theme and manufacturing is one of those topics we have always had our eyes on. We've been making some big predictions about a transformation in this sector, so it makes sense that it features prominently in the big debates we've identified for North America in 2026. In the last few years, there's been a steady stream of investments in automation, controls and upgrades across U.S. manufacturing. And this is happening against a backdrop of shifting global supply chains and lingering policy uncertainty. Now the big market debate is whether these investments will generate a whole wave of greenfield projects, that is brand new multi year construction initiatives to build facilities, factories and infrastructure from the ground up. Chris, what exactly is driving this current wave of efficiency and productivity investment in U.S. manufacturing and how long term of a trend is it?
B (1:16)
I think what's driving the inflection is tariffs. The view that has underpinned my US reshoring call is that I believe companies have to serve the US market. The US accounts for 30% of global consumption, equal to EU and China combined. It is also the best margin region in the world. So companies have to serve the market. And now what they're doing is they're going back and they're looking at their production assets that they have in the US and they're saying, how can I get more out of what's already here? So the quickest, cheapest, fastest way to bring production online in the US is drive better productivity and efficiency out of the assets you already have. And we're seeing it come through very quickly after Liberation Day.
A (2:03)
And you think these investments are an on ramp to larger greenfield projects. What evidence do we have that this efficiency spend is setting the stage for a ramp up in new factory builds?
B (2:14)
I think this is absolutely the leading indicator for greenfields because this is telling us that the supply chain cost calculation has changed. What all of these companies are doing are saying, okay, how can I get products into the US at the cheapest cost possible? What we're seeing is the cost of imports have gone higher with tariffs and now it's more economically advisable for these companies to make the product in the United States. And if that's the case, that means that when they need a new factory it's going to come to the United States. They might not need a factory now, but when they do, the US is at least incrementally better positioned to get that factory. Other data that we're seeing, I think the most interesting data that's come out of all of this is the bifurcation in global PPI or producer price data. If you look at it on a regional basis, North America markets saw PPI go higher in 2025. They were all the tariff exempt regions, US, Canada and Mexico. Every other region in the world saw PPI down year to date. That means that these companies and factories are having to lower prices to stay competitive in the global market and sell their products into the United States. That tells us also where the next factory is going. If you have a factory in the US And a factory in Malaysia and your US factory is pricing up, that means the return profile is getting better. If your factory in Malaysia is pricing down, it means the returns are getting worse and you're pricing down because it's overcapacitized. That's not a region where you're going to add a factory. What I like to say is price drives returns and supply is going to follow returns. And right now that price data tells us the returns are in the United States.