U.S. Manufacturers Find Value in Bringing Jobs Back Home

November 6, 2012

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Economic conditions are driving many overseas manufacturing operations back to the U.S. How widespread is the reshoring trend and what benefits can we expect to see?

A recent survey of United States manufacturers found that 14 percent of companies plan to move at least some of their operations back home from overseas – they're “reshoring.”

According to the Wall Street Journal, their motivation stems from “a desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property.”

A separate survey from the Boston Consulting Group (BCG) in February yielded similar results. BCG polled 106 companies with sales of $1 billion or more per year and found that 37 percent either were planning to reshore or were actively considering it.

The savings from reshoring can be substantial. Acorn Systems of Houston, Tex., polled 114 of its manufacturing clients recently and found that 32 of them had undertaken reshoring initiatives. Astoundingly, the companies that reshored manufacturing operations saved an average of $23 million, the Houston Business Journal reports.

Harold Sirkin of BCG told Knowledge@Wharton that the drivers behind reshoring really come down to “very simple economics.” Improvements in Chinese productivity simply are not making up for rising wages and the devaluation of the currency.

“Our predictions are that by 2015, the manufactured costs in China will be about 10 percent lower than the manufactured costs in the U.S. for a whole lot of goods,” Sirkin noted. “That doesn't mean all the goods. It's not for clothing and shoes. But it's for a wide range of goods – about 70 percent of the goods that we, the United States, import from China.” And that 10 percent, he maintains, will be eaten away by other factors.

According to BCG, “China's overwhelming manufacturing cost advantage over the U.S. is shrinking fast.” BCG recommends that companies undertake “a rigorous, product-by-product analysis of their global supply networks that fully accounts for total costs, rather than just factory wages.” That analysis will show that the U.S. will become the better manufacturing option for many business situations. In other words, “China should no longer be treated as the default option.”

Rapidly rising wages in China are changing cost considerations. Wages and benefits in China rose 10 percent per year from 2000 to 2005, but then a whopping 19 percent per year on average from 2005 to 2010. During the same period, though, the full cost of U.S. production work rose by only 4 percent. In the Yangtze River Delta, where Shanghai is located, the firm predicts that labor costs will rise an average of 18 percent per year over the next five years. In addition, BCG projects that productivity for Chinese workers will only grow at half the pace of wages.

Yet labor costs are only part of the picture. “The labor content ranges from only about 7 percent for products like video cameras to about 25 percent for a machined auto part,” BCG explains. Taking into consideration transportation, duties, other costs and the depreciation of Chinese currency, “companies may find that any cost savings to be gained from sourcing in China may not be worth the time and myriad risks and headaches” of maintaining such a geographically extended supply chain.

Sirkin believes that these fundamental economic changes will bring 2 million to 3 million jobs back to the U.S. over the next 10 years, adding $100 billion in economic growth to the country's economy.

Commenting on this trend, sourcing and supply chain expert Michael Lamoureux cautions that manufacturers need to make certain they are bringing the right jobs back for the right reasons.

“[W]hen you start looking at the overall picture, the overall product lifecycle and the strengths and weaknesses of outsourced manufacturing partners," Lamoureux notes, "you'll realize that some manufacturing, even with the disappearing wage differential, should be left in China; some should be brought back home yesterday; and some should be near-sourced,” such as to Mexico, which currently has idled factories that could be put to work cost-effectively.

Lamoureux believes that wage analysis alone is never a sufficient reason for outsourcing. “China is dominant in many areas of electronic manufacturing now and will stay that way,” he writes, “and considering the density of phones, tablets and laptops, it makes sense to produce them in China. On the other hand, major appliances and automobiles should be produced at home, where efficiencies in production and greatly reduced transportation costs more than make up for the labor differential.”

 

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