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Reshoring: Why US Manufacturers are Coming Home

Posted by Allan Peiser, CPA on Dec 8, 2014 8:41:58 AM

In our September 2014 Manufacturing Metrics newsletter, I explored the question of whether Mexico is the new China for manufactures. In this newsletter, I am now addressing the question “Is the U.S. in a position to attract manufacturers back home?”

It is indisputable that reshoring has steadily risen over the past few years and will continue to do so in the future. A 2012 survey found that 40% of contract manufacturers in the U.S. were involved in reshoring work. According to 2014 survey by the Boston Consulting Group (BCG), 54% of those executives who responded are considering bringing production back to the U.S., an increase of close to 40% since 2012. Respondents also indicated that they expect their manufacturing “footprint” to grow in the U.S. more than in other countries. Other statistics from the 2014 BCG survey reveal:

  • A 20% increase in the number of manufacturers who are actively reshoring.
  • A 7% rise in the future manufacturing capacity in the U.S., and a 5% to 20% decrease in capacity in China, Western Europe, and Mexico.
  • The U.S. has surpassed China and Mexico to become the most likely destination for companies that are shifting manufacturing capacity to serve the U.S. market.
  • U.S.-based executives anticipate that a larger share of their total manufacturing capacity will be domestic in five years.
  • Manufacturers are 4.5 times more likely to move production to the U.S. than from the U.S.

Why the shift to reshoring?

U.S. Congressman Frank Wolf (R-VA) may have said it the best at a summit on reshoring manufacturing jobs back to the U.S.

“Many companies that have offshored are unhappy with the quality of goods produced overseas. Labor costs are rising rapidly. Shipping costs are rising rapidly. The cost due to the theft of intellectual property by the Chinese government is almost incalculable. That’s why there has been so much more interest in reshoring manufacturing over the last several years. I believe this trend will continue to accelerate, especially with encouragement from the government and business community. A great nation cannot survive by exporting ideas and innovations alone. It needs to also produce these items as well. Our future depends on it.”

7 factors influencing reshoring

  1. Skilled Talent: While a skills gap exists for manufacturers in the U.S., the BCG study indicated this issue was not a compelling reason for manufacturers to move production offshore. In fact, it was quite the contrary: 70% of manufacturers in this study said that better access to skilled talent was a reason for moving operations back to the U.S. This outweighed, by 4.5 times, the respondents who cited access to talent as a reason for relocating production outside the U.S.
  2. Lower Energy Costs: While highly controversial, fracking and natural gas revolution has enabled manufacturers in the U.S. to be competitive with counterparts in China. According to an article in Foreign Policy, “Cheap energy is giving American manufacturing an unexpected and massive competitive advantage (resulting in more than $90 billion in new investments in manufacturing). Estimates on how much shale gas will add to economic growth vary, but many economists believe it is at least 0.5 percent per year for the next years.” Currently, manufacturers in the U.S. pay between $4 and $5 per million BTUs, as compared to $20 per million BTUs in China.
  3. Intellectual Property: The issue of protecting intellectual property is an important factor in manufacturers’ decisions to reshore. Of all IP thefts from U.S. companies, 80% came from China, according to the U.S. government. Cerasis reports that as many as 58% of manufacturers feel that the lack of enforcement of intellectual property rights in China and other countries is a major detractor for doing business in those countries.
  4. Consumer Pressure: There are two issues at play here: a) The desire of Americans to purchase “Made in America” products. b) The desire of Americans to purchase products from companies that have instituted sustainable manufacturing processes and procedures.More and more Americans are paying attention to where a product is made and its impact on the environment. In fact, a Nielsen study shows that consumers are willing to pay a higher price for goods from companies committed to environmental sustainability. (See Sustainable Manufacturing Article) Consumers understand that products manufactured in the U.S. are subject to strict Environmental Protection Agency standards; products manufactured in China are not. Americans are also concerned about the environmental impact of shipping goods from China to the U.S.Reshoring, although it will not eliminate the problem, reduces the carbon footprint of many manufacturers. Contrary to what some may think, manufacturers are concerned about the impact their factories have on the environment. According to the most recent PwC report, as many as 87% of industrial manufacturing CEOs believe it is important to measure and try to reduce their adverse environmental impact.
  5. Labor Costs: The cost of labor, while once a driving factor for manufacturers to set up shop in China, is becoming less and less relevant. According to an article by Agracel, Inc., the increased value of the yen has caused the cost of manufacturing in China to rise by 187% compared to a rise of 27% in the U.S. In addition, the BCG calculates that, “that annual wage and benefit increases of up to 20% at China’s factories will slash its labor-cost advantage over low-cost American states from 55% in 2011 to 39% in 2015.” Factor in the decline of organized labor and the unions recent flexibility with regard to wages and benefits, and the move to reshore becomes a lot more affordable.
  6. Automation/Technology: With advances in automation and technology, the need for low wage factory workers in places like China may no longer be necessary. According to BCG, 56% of survey respondents said they either strongly agreed or somewhat agreed that the “declining costs of automation have improved the competitiveness of their products against those made in low-cost countries.” As many as 71% agreed that automation and technology will improve the economics of producing goods in the United States.
  7. Supply Chain: Long supply chains leads to higher costs. Shipping products from China to the U.S. requires more lead time then trucking products from Texas to Maryland. It is not just the time it takes to get from one port to the other that is a factor. Once the product reaches the port, it still must be transported by truck or train and loaded and unloaded to get it to where it needs to be. The BCG survey reports that approximately 80% of respondents cited logistical factors such as shorter supply chains and lower shipping costs as primary reasons for moving operations to the U.S. from other countries.

The above is by no means an exhaustive list of reasons manufacturers are moving from China to the U.S. Other considerations such as culture, language, political environment, and U.S. government incentives also factor into the equation. Experts at A.T. Kearney, writing for Manufacturing.net summed it up best:

“A number of macroeconomic factors seem to have tipped the balance in favor of domestic manufacturing. Among them, for example, are the appreciation of China’s currency versus western currencies, labor rate inflation, increased concerns about supply interruption and adulterated product and lowering energy cost in the United States due to prospects of shale gas. Even President Obama’s administration, banking on these trends, is actively encouraging companies through its ‘Make It In America’ campaign to shift manufacturing back to the United States to create jobs and increase the country’s competitiveness on the international stage.”

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Manufacturing, reshoring