U.S. to Match China in Manufacturing Attractiveness by 2015

May 9, 2013

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New research shows that the U.S. has now matched Mexico as an attractive location for manufacturing in terms of labor and operational costs, and will match China in desirability by 2015, which will vastly accelerate reshoring.

According to a recent survey from AlixPartners, the United States and Mexico are now considered equally attractive options for U.S.-based companies to situate production meant for the North American market. Thirty-seven percent of the 137 respondents would choose the U.S. as their preferred nearshoring location. An equal percentage would choose Mexico.

The improvement in the U.S.’s attractiveness has been rapid: In 2011, 63 percent of manufacturers said they would locate nearshoring operations in Mexico and only 19 percent said they would choose the U.S. In 2012, those numbers had shifted dramatically, with 49 percent preferring Mexico and 36 percent the U.S.

About half the companies responding to the 2013 survey had annual revenues of $1 billion or more, and all of the respondents sourced production across multiple continents.

The outlook for surpassing China as the top manufacturing destination is also encouraging. AlixPartners found that if current trends hold, by 2015 the U.S. could be as attractive a manufacturing location as China.

“By 2015 the cost of importing manufactured products from China will be about the same as manufacturing them in the U.S.,” the report noted, adding that “other key low-cost countries, such as Mexico and India, will remain highly competitive...Mexico and India have maintained cost advantages vis-à-vis China of 15 percent to 20 percent, similar to the advantage levels China enjoyed over other low-cost countries in the early 2000s.”

Others feel that rising Chinese labor costs are having less benefit for the U.S. than for Southeast Asian economies, such as Thailand and Vietnam. “In terms of nearsourcing, it has only been evident as blips – such as when Thailand was under water and Japanese car manufacturers temporarily used U.S. suppliers for parts,” Michael Webber, president of Kansas City-based Webber Air Cargo, Inc. told IMT.

However, AlixPartners cautions against rushing to move production out of China, India, or Mexico in favor of the U.S., given the great variation in “product type and several other factors.” Careful analysis of the specific conditions for different types of manufacturing is always essential – for some operations, remaining offshore may remain the best option.

Nearshoring has become the predominant concern among manufacturers. The survey found that 84 percent of survey respondents think the decision to nearshore is “important or somewhat important,” whereas only 53 percent said so last year. Nearly half (49 percent) think nearshoring is a good opportunity for serving U.S. demand. Of that 49 percent, one-third are currently nearshoring and 57 percent say they have plans to nearshore within one to three years.

Russell Dillion, director of enterprise improvement for AlixPartners, said that in addition to “patriotism,” the growing appeal of the U.S. as a nearshoring destination could be attributed to closer proximity to end markets; better legal and regulatory transparency; and concerns about security and corruption in Mexico.

Moreover, the costs of offshoring production are becoming increasingly onerous for U.S. companies, and as American manufacturers worry more about the insecurity of intellectual property in China, many businesses are discovering that it makes more sense to keep production capacity at home.

According to Forbes, rising wages around the world, especially China, are bringing the rest of the world closer to American labor costs, and higher overseas energy prices and transportation costs are bringing some production 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.”

In general, America is also becoming a lower-cost manufacturing destination when companies consider the “total cost of ownership,” or TCO: the cost of quality, delivery, transportation, energy consumption, labor monitoring, carrying stock, freight, packaging, and all other aspects of production, as well as labor costs. Energy costs are particularly important, and thanks to shale gas, energy in the U.S. is significantly cheaper than before.

Manufacturers are paring shipping costs in an effort to keep their foreign manufacturing operations profitable. “Apart from the express shipments, such as parcels and small packages, much of the U.S. cargo transport has already gone to surface,” Webber noted, adding that “ocean has captured market share from air on transcontinental shipments.”

 

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