Is the U.S. the Next Low-Cost Manufacturing Country?

April 16, 2013

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Not only are American companies pulling back on their overseas production, but foreign businesses view the United States as an attractive alternative to producing at home. It could be that America is becoming a low-cost manufacturing destination.

As the costs of offshoring production are becoming increasingly onerous for U.S. companies, and as American manufacturers worry more about the security of their intellectual property, many businesses are discovering that it makes more sense to keep production operations at home.

Last year, Manufacturing Trends and News concluded that “changes in the economic environment are making homeshoring more and more attractive, with a number of manufacturers actively moving their offshore operations back to the home turf.”

But it's not U.S. firms anymore. The U.S. is becoming an increasingly attractive location for foreign businesses to operate, largely due to the boom in shale gas production that is making energy costs lower.

"Shale gas has become a game-changer for the U.S. manufacturing renaissance,” Sath Rao, vice president of industrial automation and process control at market research firm and business consultant Frost & Sullivan, told IMT. “Abundant quantities and subdued prices are helping U.S. manufacturing fortunes.”

One thing that’s causing domestic companies, at least, to rethink their production locations is the “total cost of ownership,” or TCO. When taking into account the cost of quality, delivery, transportation, energy consumption, labor monitoring, carrying stock, freight, packaging, and all other aspects of production, instead of focusing only on labor costs, it might make more financial sense to keep production at home.

Energy costs are particularly important in the TCO equation. As Rao noted, “Energy-intensive industries, all the way from mini-steel plants to downstream chemicals, are witnessing interest [in reshoring] like never before…high-tech industries are also selectively looking at reshoring to the U.S.”

Caterpillar recently decided to build a new 600,000-square-foot hydraulic excavator manufacturing facility in Victoria, Texas, citing the location's proximity to the company’s supply base, access to ports and other transportation, and the positive business climate in the state.

Iconic American companies like Apple and GE are homeshoring production as well. Forbes explains that the U.S. is currently “more attractive than China, Korea, India, and other low-cost regions where global manufacturers once rushed to move production.”

In fact, GE’s decision to shift some production from China to Kentucky resulted in a 20 percent lower sticker price for final products, higher quality, and reduced lead times from factory to warehouse.

Forbes identifies three major factors in this shift: Rising wages in China, which have increased 500 percent since 2000 and are expected to grow 18 percent annually for the foreseeable future; higher energy, transportation, and manufacturing costs; and increased labor productivity in the U.S., due to plant enhancements and a shift to higher-level manufacturing.

But it’s not just American companies who find advantages in bringing production back home. European companies tired of paying exorbitant energy costs are finding that it makes sense for them to shift production to the U.S.

Earlier this month, German chemicals manufacturer BASF announced plans for a wide-ranging expansion in the U.S., primarily because U.S. natural gas prices have fallen to a quarter of those in Europe.

The Washington Post noted that since 2009, “BASF has channeled more than $5.7 billion into new investments in North America, including a formic acid plant under construction in Louisiana.”

In 2007, natural gas in the U.S. cost 80 percent of what it did in Europe, but today that ratio stands at 25 percent. That’s significant enough for energy-intensive industries to make the move to America. Combined with American production staying at home instead of going overseas, it’s fueling a manufacturing boom in the U.S. In the chemicals manufacturing industry alone, companies are building plants worth an estimated $95 billion.

But, as Rao cautioned, “The question then is, will the U.S. manufacturing industry be lulled into using the same-old energy efficiency practices and technologies as they build for the future? We sure hope not.”

 

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