The Representor, Lead Article, Spring 2012 Issue
As Clint Eastwood predicted in his often-replayed Super Bowl commercial, American manufacturing’s “second half” indeed appears to have begun. The Federal Reserve Board reports that, while still running slightly below its December 2007 peak, U.S. factory output has risen 16.7 percent since the recession’s lowest point in June 2009. Manufacturing job creation is outpacing other employment sectors, and the Department of Labor says factory wages are healthy, with new manufacturing jobs spurring more consumer spending than new service industry jobs.
This is all good news, of course, but several obvious questions arise. What about all that manufacturing, particularly in the electronics industry, that moved offshore over the last decade or so? Is it coming back? If yes, why will it return and under what circumstances?
The responses vary in detail, depending on the sources, but the overwhelming consensus is that offshore manufacturing is returning to the U.S., although this phenomenon will not result in a drastic decrease in offshore production. Rather, U.S.-based production is projected to rise while higher personal incomes and growing demand in Asia will keep offshore factories busy.
Call it “re-shoring,” as many do, but whatever the name, this is a trend to be reckoned with. The impacts could be huge.
“Made in America, Again”
A 2011 analysis by The Boston Consulting Group (BCG), a global strategy adviser to businesses worldwide, concludes, “By sometime around 2015, for many goods destined for North American consumers, manufacturing in some parts of the U.S. will be just as economical as manufacturing in China.” The report of the BCG analysis, titled “Made in America, Again: Why Manufacturing Will Return to the U.S.,” describes how Chinese wages are rising by 17 percent annually and the value of the yuan is continuing to incease. So the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states – including Mississippi, South Carolina and Alabama – increasingly competitive as low-cost bases for supplying the U.S. market.
Harold L. Sirkin, a BCG senior partner and lead author of the “Made in America” report, says, “Reinvestment during the next five years could usher in a ‘manufacturing renaissance’ as the U.S. becomes a low-cost country among developed nations … As a result, you’re going to see a lot more ‘Made in the USA’ products.”
Which industries will return their production? BCG lists seven – computers/electronics, transportation goods, electrical equipment/appliances, furniture, rubber products and plastics, machinery and fabricated metal products. Together, BCG estimates, these seven industry groups could add $100 billion in output to the U.S. economy and lower the nation’s non-oil trade deficit by 20 to 35 percent.
“Workers and unions are more willing to accept concessions to bring jobs back to the U.S.,” notes Michael Zinser, a BCG partner who heads the firm’s manufacturing work in the Americas. “Support from state and local governments can tip the balance.”
Zinser adds, “This does not mean that factories in China will close. Instead, more of their output will be consumed in the fast-growing domestic market and elsewhere in Asia.”
Manufacturing executives should not make the mistake of comparing average labor costs for production workers in China and the U.S. when making investment decisions, cautions Zinser. The costs of Chinese workers are still much lower, on average, than comparable U.S. workers, and some managers may assume that China is a better location. But averages can be deceiving.
“If you’re just comparing average wages in China against those in the U.S., you’re looking at the problem in the wrong way,” Zinser warns. “Average wages don’t reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today.”
Sirkin, whose most recent book is “GLOBALITY: Competing with Everyone from Everywhere for Everything,” urges, “Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs. They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother – and that’s before taking into account the added expense, time and complexity of logistics.”
The BCG report and a March 2012 supplement specifically name several U.S.-based companies that are rethinking their production locations and supply chains for goods destined for sale in the U.S. For some – including Caterpillar, NCR, Ford Motor Company, Sleek Audio, AmFor Electronics and Peerless Industries – the economics have already reached the tipping point, and they have moved or are in the process of moving factories back to the U.S.
Peerless, for example, says it is consolidating all manufacturing of its audiovisual mounting systems in Illinois. The company is moving production from China to achieve cost efficiencies, shorten lead times and gain local control over its manufacturing processes.
Sleek Audio, a small manufacturer of in-ear headphones for iPods and other audio devices, relied on factories in China for three years before shifting much of its production back to the U.S. during 2010-11. In a CNN Money report, Sleek’s owner, Mark Krywko, cites delays, quality control, communication problems and shipping costs as major reasons for the move. A ruined shipment of 10,000 sets of earphones costing millions of dollars was devastating to the company and spurred the return to U.S. production. Sleek’s costs are 15 to 20 percent higher in the U.S., Krywko says, but he is relieved to be free of the “hidden costs” of trying to manage production in China from the U.S.
AmFor Electronics, a contract manufacturer, cited delivery responsiveness and ease of design revisions as reasons for recently moving its wire harness production and some final assembly from China and Mexico to Portland, Ore. After implementing lean production practices, AmFor also found that its landed costs were lower than when it was using overseas suppliers.
While the BCG analysis and report focus on China, other offshore production locations are acknowledged. The BCG concedes that some manufacturers are relocating factories from China to nations with lower labor costs, such as Vietnam, Thailand, Indonesia and Mexico. However, these countries are not expected to be able to absorb all the higher-end manufacturing that otherwise would go to China because they lack adequate infrastructure, skilled workers and domestic supply networks. And in many of these countries, the BCG stresses, wages are on the rise, much like in China.
Other sources confirm re-shoring trend
The BCG is far from the only voice being heard and read on the subject of re-shoring. A mid-2011 joint survey by MFG.com and Reuters yielded many inputs verifying the re-shoring trend. Among those polled were North American CEOs, economists, journalists and even shop floor workers. The survey results posted on Reuters Insider include these highlights.
- Of all the companies surveyed, 15 percent said they have repatriated production back into the U.S. since mid-2009.
- Of those manufacturers currently using offshore production, 40 percent are investigating bringing that work back to the U.S. within the next year.
- Diane Swonk, chief economist of Mesirow Financial, says trends like re-shoring often sustain for decades. as opposed to years, and she believes that, now that the risks of offshoring have been revealed, hundreds of thousands of jobs could be repatriated over the next five years.
- Peter Dorsman, senior vice president of global operations for NCR, which recently moved production back to the U.S. from China to respond more quickly to competition and market trends, says he’s received many calls from CEOs of other companies looking to follow suit and re-shore some or all of their production.
From another source, the GE Economic Intelligence Unit conducted an August 2011 survey of 360 senior executives of U.S.-based manufacturing companies in many industries. The survey results report, titled “The Future of Manufacturing,” concludes in part, “Rising labor costs in emerging markets and the U.S.’s innovative heritage offer reason for guarded optimism in the future of the U.S. as a manufacturing destination.”
A late 2011 survey of shipping companies by transportation research firm Wolfe Trahan showed a significant shift in its clients’ thinking since 2010. Among companies planning to move production, those considering an increase in outsourcing to China fell to 9 percent in October from 18 percent in April. Those expecting to shift production back to the U.S. rose from 10 percent to 21 percent over the same time period.
In “Manufacturing’s Secret Shift,” a recent study by Accenture, 61 percent of 287 manufacturers surveyed reported that they are thinking of moving operations closer to customers. And supply chain analysts at technological research firm Gartner, Inc., predict that the production of 20 percent of goods now made in Asia for U.S. consumption will shift to the Americas by 2014.
An additional note of confirmation comes from a meeting at the White House. Just prior to his State of the Union speech earlier this year, President Barack Obama convened a daylong Insourcing Forum to explore how to bring outsourced jobs back to the U.S. Among the participants were Vice President Joe Biden, a number of Cabinet members, a cross-section of industry leaders, BCG’s Harold Sirkin and Harry Moser, a 40-year manufacturing industry veteran, former president of machine tool company GF AgieCharmilles and the founder of the not-for-profit Reshoring Initiative. Moser and his organization are committed to helping companies with their re-shoring efforts.
Harry Moser and the Reshoring Initiative
The Reshoring Initiative was established by Moser in 2010 to bring manufacturing jobs back to the U.S. The Initiative works with manufacturers to help them recognize their profit potential as well as their vital role in strengthening the economy by utilizing local sourcing and production.
Moser’s passion for boosting U.S. manufacturing probably originated when he experienced the “glory days” firsthand. His grandfather and father worked for the Singer Sewing Machine Company in Elizabethtown, N.J., and Moser was a summer vacation employee there when he was a student. The sprawling factory is now gone, like many other U.S. manufacturing facilities, and Moser is determined to show companies that U.S. manufacturing is still profitable.
At that White House meeting in January, Moser was asked by the president about the costs that manufacturers typically ignore when deciding where to locate their factories. Moser’s reply zeroed in on what he terms the “total cost of ownership.” That includes factors such as intellectual-property risk, the cost and time of travel to visit distant suppliers, and the negative impact of separating manufacturing from engineering staff back at headquarters.
Using data compiled from 10 manufacturers that compared the costs of products and components made in the U.S. versus China, Moser told Obama that, when measured on price, the U.S. was on average 108 percent higher. When Moser analyzed the total cost of ownership, which includes 28 additional factors, the U.S. averaged only 12 percent higher. In six cases, the total cost for the U.S. was lower than China by an average of 22 percent.
“The U.S. is a lot more competitive than people realize,” he says. “Over the last several years, firms got caught up in the outsourcing trend without thinking through the costs.”
During the White House forum, Moser provided details on the Reshoring Initiative’s Total Cost of Ownership Estimator, a free, downloadable program available through the organization’s Web site – www.reshorenow.org.
Users of the Estimator software can account for all relevant factors when determining their total costs, including overhead, balance sheet, corporate strategy and other internal and external business expenses. A total of 29 cost factors are incorporated, and calculations are based on each user’s unique data. The only data supplied by the software are duty rates and freight rates.
The Estimator program, says Moser, can “quickly and easily help uncover costs that might not otherwise come to light. Large companies can use the tool to aggregate their costs and risk factors to truly compare apples-to-apples in their sourcing decisions. In addition, smaller companies can also utilize the software as a sales tool, harnessing it to more accurately relect their competitiveness with overseas manufacturers.”
Moser hopes the exposure given to the Estimator at the White House forum will prompt more U.S. companies to use and benefit from the tool. He also urges manufacturers to visit his organization’s Web site to learn about re-shoring successes and to share their own experiences.
“Re-shoring,” he insists, “is an efficient means of reducing imports, increasing exports and regaining manufacturing jobs in the U.S. … [It’s] also the fastest and most efficient way to strengthen the U.S. economy.”
This article was written by Tess Hill, editor of The Representor.