One trend that will undoubtedly receive attention on Manufacturing Day this year, Oct. 5, is reshoring, the movement of manufacturing from once lower-cost countries such as China back to the United States.
Reshoring as both a concept and a practice is a recent but growing development. Nevertheless, proponents such as Harry Moser, founder and president of the Reshoring Initiative, based in Kildeer, Ill., credit reshoring with generating 50,000 U.S. manufacturing jobs in the past two-and-a-half years — 10 percent of the total American manufacturing jobs created since 2010, he says.
Additionally, reshoring could contribute to a reduction in the U.S. trade deficit. At the IMTS 2012 trade show in Chicago last month, Moser, when asked how confident he was that reshoring will increase, replied, “In the long run this has to happen. The U.S. cannot sustain a $600 billion trade deficit each year.”
Moser believes that 500,000 manufacturing jobs could be created in the U.S. through reshoring by 2015, or 25 percent of the projected total of new manufacturing jobs. He bases this projection on two factors. One is that labor costs in China are rising, which increase the cost of products made there and chip away at companies’ bottom lines. The other, and most important, is “Total Cost of Ownership” (TCO), a cost analysis he developed that integrates a dozen or so cost and risk factors associated with offshore manufacturing to compute the true cost of a product made overseas.
Moser’s Reshoring Initiative organization offers his TCO software on its website, www.reshorenow.org, to registered site users. He says that when decision-makers plug in their numbers and evaluate what it really costs to manufacture products offshore, even in supposedly low-cost areas such as China, they will find that it is no more expensive — and likely cheaper — to make them in North America.
TCO would replace a cost analysis that is based on product price alone. Moser says that his organization is collecting case studies of companies that manufacture products in China, and so far, the economics of China manufacturing have been analyzed for 19 companies. If looking at a product alone, manufacturing in the U.S. is up to 89 percent more expensive than in China, depending, of course, on the product. Once TCO is factored in, however, Moser says the cost becomes competitive. Moreover, domestic production would eliminate the associated expenses of frequent travel to China, quality problems that go undetected until a product shipment is received, shipping costs and delays, and potential compromise of intellectual property.
Moser, who could be seen as the “Apostle of Reshoring” for his energy and enthusiasm in promoting the concept, adds that if more companies used the TCO calculation, more than half of work slated for offshoring (53 percent) would stay in the U.S. The 500,000 jobs figure he cites is based on companies that already have applied TCO to their cost calculations.
“U.S. companies must learn that they can’t just chase low wages,” he remarks.
Reshoring is attracting attention from a number of organizations. The Department of Commerce has added the TCO estimator to two of its websites, Moser says, and various groups and consultants are paying close attention to the trend and its implications.
Industry observers are finding many factors that support the trend. As noted in a recent posting on reshoring, according to a study by the Hackett Group, wages in China have been increasing by 15 percent annually in recent years. This and rising costs for raw materials, logistics, inventory carrying charges and taxes and duties cause what Hackett Group terms “Total Landed Cost” (similar to TCO) to rise significantly, which makes reshoring a viable choice.
However, despite higher costs, reshoring is not an option for all products. Moser notes that commodities with high labor content in their manufacture, such as textiles, will probably not return to North America. These could still leave China, but relocate to Vietnam, Myanmar, the Philippines and other low-cost countries.
He believes that reshoring will be most attractive for higher-end products and durable goods that moved offshore in the past decade — machinery, appliances, industrial parts and consumer goods, among others. That the production of these products can be extensively automated, thus reducing cost and quality issues, is another factor in reshoring’s favor, he says.
Moser believes that if reshoring increases and manufacturing wages rise along with jobs, companies’ enthusiasm for producing goods domestically won’t dampen. The increase in wages might not be that significant when considered with the benefits. Moser says that U.S. wages could increase 4 to 5 percent on the strength of reshoring. With automation playing a role in cost-efficient production of reshored goods, he adds that it will be vital for companies to find and adequately compensate trained personnel who operate automation and high-tech machinery.
Producing goods locally would also benefit a company’s brand. Touting that a product is “Made in America,” rather than only designed or assembled here, would be a powerful selling point, all other things about it being equal. Some companies would probably reap major gains from such a move. If Apple, a unique brand, ever decided to manufacture its iconic iPhone in the U.S., it would be a “major differentiating factor” that competitors couldn’t match, Moser says.
Moser believes that reshoring is an activity that must be supported by different levels in the marketing chain and by government. Consumers need to be made aware of reshored products and encouraged to seek them out and buy them if they are competitive. Retailers should make an effort to promote reshored goods if, again, they are competitive. And government needs to provide tax incentives and other inducements to foster growth, along with education and training programs to assure that there are enough skilled workers available for domestic production.
If all of this happens, Moser believes that the 500,000 manufacturing jobs he predicts from reshoring by 2015 could top 3 million in coming years, making what is now a trend a fully established part of U.S. manufacturing strategy and government industrial policy.