There are many indications that a resurgence in U.S. manufacturing is taking place. Yet questions remain. Can the momentum be sustained? Is it substantial enough to make an impact on a $15 trillion economy? What segments offer the greatest opportunity for investors? Does Asia still matter?

Until recently, it has been widely assumed that manufacturing would continue to leave the U.S. in search of low-cost labor. Several factors now suggest this trend may be changing. As a result, it is increasingly important for private equity firms targeting the manufacturing sector to establish and maintain a network of operating expertise that can help develop optimal strategies for building value in their investments.

In a recent study, Boston Consulting Group identified seven major industries accounting for $2 trillion in annual domestic consumption with the potential to return manufacturing to the U.S., creating 2 million to 3 million jobs, reducing unemployment by 1.5% to 2% and adding a nontrivial $100 billion or more in revenues to the U.S. economy.

Many factors are driving this shift, including shorter lead times, quality control, improved customer service and more control over intellectual property. Labor costs are moving in favor of domestic producers. Wages in China have been rising, and though they're unlikely to reach parity with the U.S., the change has been substantial enough to make manufacturers look closely at the costs and benefits of moving jobs abroad.

The truth is that many of the repetitive, low-value-added jobs that moved to low-wage countries won't return. Meanwhile, a new role for U.S. manufacturing has emerged in which goods made here are becoming a more robust part of the global supply chain, combining higher-value-added domestic manufacturing with lower-cost outsourced components, often still originating in Asia. Agile processes and the highly productive U.S. workforce -- in tandem with parts sourced from low-cost countries -- position companies to build competitively for both domestic and export markets.

Contrary to popular opinion, the U.S. never really gave up its manufacturing capacity. As the BCG report notes, the U.S. continues to manufacture more than half of the appliances sold domestically, 61% of machinery, 70% of transportation goods and 71% of furniture. It exports roughly $1.3 trillion of manufactured goods annually, primarily to Europe, Canada and Mexico. Behind each of the major manufacturers in these markets stand dozens of middle-market vendors, supplying parts and subassemblies.

Middle-market companies have always been an important part of the domestic-manufacturing infrastructure. For PE investors, these companies represent some of the best opportunities to add value as they face the threat of global competition and the opportunity of a resurging U.S. manufacturing base.

The middle market is ripe with investment opportunities because process inefficiencies have had a longer time to linger and haven't been top of mind for management teams. Operationally, we strive to improve supply chain management, reduce lead times and inventory and streamline the manufacturing process, which may involve bringing new offshore suppliers into the mix. We see millions of dollars of enterprise value creation opportunity by supporting these initiatives with management. When properly done, this allows us to accelerate our value creation, sometimes by as much as two to three years.

However, not every middle-market manufacturer can take advantage of these types of resources. Some are already efficiently managed; others are in markets with more limited opportunity to benefit from low-cost-country sourcing of components or finished products. Opportunity exists among those with a strong, defensible product portfolio and domestic production, coupled with opportunities for incremental value creation through continuous improvement initiatives and a low-cost-country component-sourcing strategy. For private equity, identifying those companies and the strategy to expand the customer base is a big part of the challenge.

U.S. manufacturing will continue to evolve. With low energy costs, competitive labor and a strong position in the global supply chain, domestic manufacturing is positioned to continue to grow for years to come. The key for PE buyers is to be able to understand the cost-benefit analysis of where to place manufacturing and how this impacts customer service and company culture.

Rob Ospalik is director of portfolio management and Roberto Ferranti is vice president of portfolio management for Chicago-based Baird Private Equity,
the global private equity group of
Robert W. Baird & Co.