2025 US Reshoring Reassessment Part 1

Perhaps by necessity, US tariffs aim for something closer to self-sufficiency

TL; DR

• As AI and drone technologies reshape the 21st-century battlefield, the US is recalibrating its reshoring goals away from a minimum viable capacity to something closer to self-sufficiency. The ongoing tariff saga that began on Liberation Day is the first of what will be many attempts to force this recalibration and bring manufacturing capability back to US shores.

• There have been some notable successes with CHIPS Act subsidies supporting TSMC's Arizona facility and the recent US expansion of AI server assembly operations. Manufacturers of consumer electronic devices, particularly smartphones, are less inclined to reshore. The cost penalty and the lack of a supporting ecosystem are major barriers.

Introduction

We have had our heads down buried in projects over the last few months, which unfortunately puts the research on the website at the bottom of the priority list. We are in a good spot to take a short breather and discuss the most important "non-AI" topic affecting the Tech hardware supply chain: tariffs and reshoring. Every decision-maker in the Tech hardware supply chain will need to understand how regionalization will impact their organization over the next few years. This note is the first of a two-part post. The second part will be released shortly after this post.

The Background

We have talked about this before here and here (probably more than we would like). Although free trade has brought a net benefit to all stakeholders, it ultimately takes a backseat to national security concerns. And leave no doubt, the rationale for US policy on reshoring is deeply rooted in national security.

Much of the concern within US defense department circles began when China launched its bold "Made in China" vision in 2015. The plan, with the implied help of subsidies, aimed to replace foreign competitors in key industries globally. That document generated a political firestorm in American think tanks that eventually led to the first trade dispute in 2018. China's heavy-handed clampdown on Hong Kong's democracy protests in 2019 and the lack of strong condemnation from the West led defense strategists to believe the same thing could happen to other provinces like Taiwan. By 2020, the US government had become increasingly concerned that an emboldened CCP leadership could invade Taiwan as early as 2027. The origin of this claim can be traced back to the testimony of a retiring admiral before the US Congress in 2021. Defense Secretary Peter Hegseth recently doubled down on this assessment.

Many manufacturers reacted to the 2018 tariffs by shifting some of their final assembly work from China to Southeast Asian countries like Vietnam, Thailand, and Malaysia. This “China plus one” approach gained momentum after COVID-19 lockdowns exposed the risks of relying too heavily on one country for manufacturing. In our research note The Tech Hardware Reshuffle, we explained how this shift could open the door for component suppliers to enter the high-volume consumer electronics supply chain. The US and other Western nations also introduced subsidies—such as the CHIPS Act—to bring semiconductor production back home.

But the Ukraine war has changed everything. Initially, as both sides lobbed thousands of missiles at each other, it was clear that the US couldn't produce arms fast enough to support the Ukrainian effort. But what really changed the thinking was the increasing use of drone warfare. Low-cost drone technology "punched above its weight," enabling the lesser-equipped and scrappy Ukraine forces to neutralize the advantages of the much larger and well-resourced Russian aggressors.

Military planners have understood the advantages of drone technology for more than ten years. But the true impact became clear only after it was tested in real combat. Almost overnight, supply chain strategies developed after the first trade dispute began to look outdated. The main goal of those trade actions—and of CHIPS Act subsidies—was to build a minimum viable US capacity in Tech hardware manufacturing. The government defined this level as enough to support defense and critical infrastructure needs during a conflict.

The scope changed completely after the Ukraine war's success with drones. The US now needs state-of-the-art miniaturization technology, camera modules, and 3D sensors. Next-generation miniature drone swarms require complex manufacturing and camera module technology to fit within a roughly 50mm x 50mm x 20mm payload compartment (or smaller). And more importantly, the US needs to be able to make millions of them at low cost and without bottlenecks. It is a formidable task because the US defense industry no longer dominates in terms of state-of-the-art size, weight, power, and cost (SWAP-C) as it did 30 years ago. Today, the smartphone is the leading edge for SWAP-C, and almost all of them are manufactured in China.

What seemed adequate in 2019 no longer meets the needs of 2025. Now, the US needs to manufacture smartphones and wearables in high enough volumes at home to support future drones, guided missiles, and electronic warfare systems. Furthermore, AI hardware is becoming a crucial component in decision-making within these systems. The focus has shifted—from building minimum viable capacity to something closer to full self-sufficiency.

Therefore, it wasn't shocking that the current administration's impetuousness led to the knee-jerk tariff announcements on "Liberation Day" in April 2025. We are not experts in Trumponomics and have no privileged insight into how trade policy will evolve over the next few months. Nor are we geopolitical analysts who can assess if or when China will forcefully (or peacefully) take over Taiwan.

It doesn't matter—the signs all point in the same direction. The rivalry between the US and China is growing. Modern warfare increasingly relies on AI, which in turn depends on advanced hardware and software. Building next-generation drone swarms requires the same assembly techniques used for smartphones. While the US leads in AI models, it cannot produce the necessary AI hardware and miniaturized assemblies in large volumes. This gap is a national security risk. As a result, some electronics manufacturing will have to return to the US. There is strong political support for this move, even if the tactics differ. Ultimately, geopolitics—not business logic—will determine the outcome. Everyone in the Tech hardware supply chain needs to face this reality and start preparing.

Nikkei Asia recently compiled a list of Tech hardware suppliers that announced plans to reshore manufacturing in the US. Notably, all of these suppliers were part of the AI server supply chain. The list shows that at least some suppliers, under pressure from their customers and the US government, are forcing electronic assembly and wafer fabrication back to US shores. However, as the article correctly points out, the US is a long way from manufacturing iPhones. Even though the company has been threatened with tariffs and publicly admonished, it has hedged its bet by relocating iPhone production for the US market to India. It says a lot, even if Apple has chosen to stay out of the public discourse.

Numerous articles were written following the US tariff announcements, highlighting the impracticality of manufacturing iPhones in high-cost regions. They boil down to two main arguments:

-           Costs (i.e., labor, regulations, etc.)

-           Lack of a supporting ecosystem (not enough domestic component suppliers).

They are valid arguments, but they also presume that reshoring means replicating the current products and manufacturing infrastructure designed for Asia. It would be devastating for commercial hardware suppliers if that's how reshoring unfolded. However, more importantly, it wouldn't even serve the strategic interests of the US Department of Defense.

In the following note, we'll review some solutions around these issues. Ultimately, it will come down to a heavy dose of AI-enabled automation and financing.

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