Reshoring: Plenty of Reasons Why Manufacturing is Coming Home

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RESHORINGWhat was once just a glimmer of hope on the manufacturing jobs horizon has, in recent years, begun to sparkle, as the “reshoring” of jobs back to the U.S. has gathered momentum.

Now there is clear and growing evidence of a trend toward reversing the loss of manufacturing and its associated jobs through the previously relentless outsourcing of jobs to China, India and elsewhere.

Manufacturing is coming home and even in scenarios in which the industrial jobs that don’t make the trip back, the technologies, such as now cost-competitive robots that eliminate those jobs are poised to create spin-off jobs in complementary sectors, such as supply, service and support.

The reasons for this promising turnaround are plentiful and, collectively, constitute an impressive barometer of reversing manufacturing job pressures and strong signs of reversing trade winds.

These trends are gathering steam despite the fact that, for instance, in China, companies that initially outsourced for the low labor costs are now motivated to stay because the Chinese market, like other overseas host economies, has become a huge market in its own right, offering distribution advantages and other benefits because of proximity.
Here is a list of what is driving reshoring (with citations of the information sources):

1. ROBOT-DRIVEN RESHORING: Replacement of overseas workers with factory robots in the U.S. is passing the break-even point for making them economically the better bet, e.g., more cost effective: USA Today, citing a Boston Consulting Group report, says, “Robots cost just the same in America as they do in China. Relative to the cost of labour, average robot prices since 1990 have fallen by 40-50% in many advanced economies, according to McKinsey.

Baxter, a new generation of robot made by Rethink Robotics, an American firm, costs $22,000 apiece and is so safe and simple that it can be taught by an unskilled worker and operate right next to real people. About 1.2 million additional advanced robots are expected to be deployed in the U.S. by 2025”

BCG reports that four industries will spearhead the reversal — computer and electronics products; electrical equipment and appliances; transportation; and machinery, mostly because more of their tasks can be automated and because they most dramatically reduce costs.

The BCG report also estimates that about 10% of all manufacturing functions are automated, and predicts that proportion will increase to nearly 25% in the next 10 years, as robotic vision sensors and gripping systems improve.

The USA Today analysis, again, citing BCG, adds that manufacturers tend to intensify robotics investments upon reaching a threshold of a 15% cost savings compared with employing a human worker. One example: In electronics manufacturing, it now costs just $4 an hour to use a robot for a routine assembly task, as opposed to $24 per hour for an average human worker.

The data suggest that replacing employees with robots is going to result in a manufacturing workforce that’s 22%—or a few million workers — smaller by 2025 than it otherwise would have been. However, despite those job losses, factory payrolls are still projected to increase, because of an expanding U.S. economy and the growing inclination of manufacturers to relocate some production back to the U.S. (Source: USA Today.)

2. ROBOT-RESHORING SERVICE JOB GROWTH: BCG estimates reshoring and rising exports will add 700,000 to 1.3 million factory jobs in the U.S. by 2020. “Many low-skills jobs, however, will be eliminated while higher-skill positions, such as operating and maintaining robots, are expected to grow.”

3. EDGE AND CLOUT OF ADVANCED ROBOT-RESHORING NATIONS: Because the U.S. is among six countries that the consulting firm characterizes as “fast” adopters of advanced robotics, including China, Canada, Japan, Russia and the United Kingdom, the reshoring trend may be most evident and pronounced in America.

4. BACKLASH AGAINST QUALITY AND LOGISTICAL OUTSOURCING PROBLEMS: Many companies are finding that there is too much capital tied up in big shipments of goods that take weeks to cross the oceans. “Innovation suffered from the distance between manufacturing and design, and quality became a problem too.” (Source: The Economist—January 19, 2013 special report, “Reshoring Manufacturing: Coming Home”)

5. RESHORING-OUTSOURCING COST EQUALIZATION AND EQUILIBRIUM: The Economist report cited Mark Coopersmith, chief executive of California-based ET Water Systems, which builds sophisticated irrigation devices for businesses. On reviewing the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, Coopersmith was stunned to discover that operating in California was only about 10% more expensive than in China.

The Economist report added that a 2012 study by Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing, reinforced the impression of cost equalization and shifting equilibria. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” said Michel Janssen, the firm’s head of research.

6. A P.R. PLUS: Reshoring can’t hurt a corporation’s public relations at home, especially in communities in which manufacturing is likely to be relocated. “Lenovo says that its decision to bring back computer-making to North Carolina was a way of looking after the firm’s reputation as well as bringing direct business benefits.” (Source: The Economist report.)

7. BIG-BOY BAND WAGON MOVES: A key trend to watch is reshoring by manufacturing giants. Sure, repatriation by small companies is a good sign, But the bigger the band wagon riders, the better. The 2013 Economist report stated that, “In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers.

It also reported that “Massachusetts Institute of Technology looked at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm plans to bring some manufacturing back to America and one-third were actively considering such a move.”

General Electric has moved manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky which not long ago had been expected to close and Google grabbed attention for choosing to make its Nexus Q, a new media streamer, in San Jose.”

It must also be noted that some of the “big boys” are undertaking partial reshoring, i.e., maintaining some off-shore operations while reshoring others. For example, a reported new Caterpillar factory in Texas to make excavators, complemented by expanded research and development efforts in China.

8. SOARING OUTSOURCE WAGES: Among the biggest drivers of reshoring is the skyrocketing wages in outsourcing, previously low-cost host countries:

“The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year.

Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.

Yet, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and raced to 19% a year in the 2005-2010 period, according to BCG. The Chinese government set a target for annual increases in the minimum wage of 13% until 2015. Nonetheless, strikes and protests continue.” (Source: The Economist report.)

In response, Honda, the Japanese automobile manufacturer, gave its Chinese workers a 47% pay rise after plant strikes in 2010. Likewise, Apple’s China manufacturing arm, Foxconn Technology Group,doubled pay at its factory complex in Shenzhen after a series of worker suicides.

As soon as 2015, says Hal Sirkin, a consultant at BCG, it will, in many industries, such as computers and electronics, machinery, appliances, electrical equipment and furniture, cost approximately no more to manufacture goods for the domestic market in America than in China.

9. OTHER OUTSOURCED WORKER PROTECTIONS: Increasing wages are not the only challenge China and other outsourcing host countries are facing. For example, a new China labor law introduced in 2008 created additional protections for workers, including the right to a permanent contract after one year of employment,

10. DIMINISHING MARGINAL UTILITY OF OUTSOURCED LABOR: The Economist reported that pressures of the relentless expansion of product and service demand are severely stressing China’s labor market. Compounding this strain is the meager harvest of China’s 1-child policies of the past 50+ years: a rapidly aging population and aging workforce.

With the best workers having been cherry-picked from the worker fields, what remains are those with “diminished marginal utility”— e.g., lower productivity, quality-control capabilities and insufficient education, training, experience or a combination of these.

11. FINICKY OUTSOURCED WORKERS: Oursourced workers are becoming feisty not only in regard to wages, working conditions and protections. Compounding China’s labor-supply problems, The Economist reports, many Chinese workers do not want to work for companies that make goods for export, because the quality standards are far higher than for the domestic market.

12. ALMOST NOWHERE LEFT TO OUTSOURCE TO: U.S. manufacturers looking for the “next China” may have to look very hard. BCG’s Sarkin suggests that the scale, skill and productivity of the China work force and in neighboring countries such as Vietnam and Cambodia, can’t hold a mass-produced candle to China’s.

Moreover, worker demands in those countries, are, with respect to pay and rights, replicating the Chinese pattern. That does leave Mexico an an alternative—which enjoys the geographical advantage of bordering the United States that translates into reduced shipping and other distribution costs. Sweetening that deal is the fact that average pay for Mexican manufacturing workers has, as of late, been only slightly higher than for their Chinese counterparts.

Ironically, some manufacturing companies, such as Chrysler, have been utilizing Mexico as a production base to supply the Chinese market with imports. Although Mexico has also become an aerospace production center, inferior or lacking infrastructure and drug-related violence are red flags for some companies contemplating outcourcing there.

13. FALLING DOMESTIC COSTS: There are threewell-known and proven ways to keep labor costs down: The first is through lower costs of resources used by labor; the second is downward pressure on wages themselves; the third, which facilitates the second, is spikes in the supply of workers. The first is being accomplished through he successful extraction of natural gas from shale, which has substantially lowered the price of fuel-based energy.

The second is facilitated by fear: For example, fear that jobs will be outsourced has probably been very effective in damping demands for higher wages and salaries. But the overseas worker is not the only brake on wage demands.

The 3rd factor, massive worker migration into the U.S.—legal immigrants or the millions of  illegal migrants—has created severe competition or at least a perception of it that may be widely inhibiting workforce aspirations and demands for higher pay, e.g., when the United Auto Workers (UAW) accepted a two-tier wage structure under which some new blue-collar workers are paid only half as much as longer-serving ones

14. RISING SHIPPING COSTS: Lower outsourcing-based wage costs are great, but only if they more than offset other costs, such as the critical costs of shipping from the overseas manufacturer. The Economist study reported that “rising shipping, rail and road costs are most damaging for companies that make goods with relatively low ‘value-density’ —such as consumer goods, appliances and furniture, according to a recent McKinsey report on global manufacturing.”

That makes reshoring or nearshoring more of a no-brainer. For example, IKEA, the Swedish home furniture giant, has opened its first factory in North America as a way to cut delivery costs.

15. SHIFT AWAY FROM LABOR-INTENSIVE PRODUCTION: Pundits predict that reshoring will be catalyzed by the use of advanced manufacturing techniques that promise to alter the economics of production, making manufacturing a far less labor-intensive process. A prime example is that of 3-D printing, which, as it advances, may do for manufacturing what the mechanized loom did for weaving.

As all of this demonstrates, there are plenty of reasons for reshoring and for the trend toward it. But, if you are not convinced or think there may be others, try your hand at shoring these up with any reasons for the surge toward reshoring you can find on your own (and feel free to post them here.)

By Michael Moffa