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Regulatory Costs for Manufacturers Continue to Mount

It has been nearly ten years since the National Association of Manufacturers published its landmark study of the impact of government regulation on the manufacturing industry. The report made clear what most manufacturers already knew—making things in the U.S. carries with it a higher cost per employee than other industries; furthermore, that cost increases dramatically for smaller manufacturers that lack economies of scale.

In the decade since the NAM report debuted, the costs associated with regulatory compliance have not improved by most measures. If anything, government officials have clearly signaled that enforcement is going to be greater than in the recent past, requiring greater corporate compliance costs to contain risks ranging from securities law and alleged Foreign Corrupt Practices Act violations to newly emergent Environmental, Social & Governance (ESG) guidelines.

Chart showing regulatory cost per employee

This month my law firm debuted its Legal Insights for Manufacturing, a detailed look at the past year and a forecast of legal and business trends for 2023. We pulled together thought leaders from across our firm and sought to provide manufacturers with a framework for what to expect in the coming year. We anticipate that among the manifold risks in play, these will exert the greatest influence on the industry in 2023:

  • Supply chain risk & reshoring
  • Cybersecurity & data protection
  • Heightened regulatory & enforcement risk
  • Product safety & associated liability
  • Increased unionization & skilled labor scarcity

To complicate matters, these areas of concern are not mutually exclusive, but rather overlap and reinforce each other. For example, supply chain disruptions create scarcity for key inputs, reinforcing global inflation as buyers bid up existing supply, and as we have seen in the recent past, entire production lines can hang on the supply of key inputs—from electricity to semiconductor chips—that are less than stable due to a variety of factors. Additionally, as businesses seek out new relationships to shore up supply, there is added risk relating to third-party compliance that touches on a number of legal and/or regulatory concerns, including intellectual property, forced labor, international trade, and product quality.

Of course, these concerns are not exclusive to manufacturing. The higher cost of compliance is something with which all businesses wrestle; however, few feel the range and depth of it as much as manufacturers. It is helpful to bear this in mind as the federal government moves to incentivize industry to ramp up production in key areas. For instance, in August 2022, President Joseph Biden signed legislation providing $52 billion in government funding to boost semiconductor manufacturing and research as well as a sizeable investment tax credit for chip plants estimated to be worth another $24 billion. Additionally, as part of the Inflation Reduction Act, signed into law in August 2022, the government has lavished a variety of tax credits on green energy initiatives and projects, including the extension and expansion of tax credits for energy manufacturing facilities and for domestic production of qualifying solar and wind components.

Amid these carrots, however, are an array of sticks that manufacturers will need to negotiate, the biggest one being the escalating cost of regulatory compliance. As businesses rethink their supply chains after the debacles of the Covid era, there are historic opportunities for U.S.-based manufacturing over the next few years, but whether the underlying economics make sense is something each business will need to assess for itself, given each’s unique position in the marketplace. A good place to start is an analysis of the increasing regulatory and legal issues that come into play.

Jeff Sigmund is a St. Louis-based partner at Husch Blackwell LLP, where he leads the firm’s 200-plus lawyer Technology, Manufacturing & Transportation industry team.