The migration of manufacturing from North America to China began 20 years ago when companies expected to reduce production costs 30 to 40% through cheap labor and other incentives.
The savings never matched expectations. Now that labor costs, tariffs and related production expenses in China are rising, manufacturing is moving again – this time to North America in a trend called reshoring. With K 2013, the world’s largest trade fair for plastics and rubber, coming up in Düsseldorf, Germany, from 16 to 23 October, it seems appropriate to review how things have developed over the years.
Reshoring, identified in 2012, is the transfer of manufacturing from China back to the U.S. and Canada. It is happening because China is becoming too expensive in labor and other costs to sustain the margins North American companies want.
Costs between the U.S. and China are “heading toward equilibrium,” says David Sievers, principal, strategy and operations practice at The Hackett Group, a global consulting firm in Miami, Florida. When expenses are counted, Sievers says it costs a U.S. manufacturer ¢84 on the dollar to make and ship products back to North America from China. At this level “it’s a toss-up” as to whether any economic benefit is realized from manufacturing in China.
A key driver is labor. Wages in China are rising at an annual rate of 15 to 18%. There are rising costs in other areas. Tax incentives are expiring, energy is expensive and shipping costs are increasing.
Sievers refers to all such expenses as “total landed cost” (TLC). Others include: capital investments; production costs; handling and inventory; transit, tariffs and other taxes; receiving and distribution in North America; product inspections; correcting quality problems; and labor.
The 16% differential between TLC and U.S. production expenses, Sievers says, happened this year. He expects it will result in many companies reshoring to North America. Hackett Group hasn’t looked at plastics opportunities, says Michel Janssen, chief research officer, but “it’s reasonable to expect that plastics will benefit from primary manufacturers bringing work back.”
Another analyst, Boston Consulting Group of Boston, Massachusetts, identifies seven manufacturing sectors as near a “tipping point” when it comes to reshoring. One is plastics and rubber products. But others include areas of high plastics use–transportation, appliances, electrical equipment, computers and electronics.
Some say the impact of reshoring on jobs in North America will be considerable. Harry Moser, who founded the Reshoring Initiative in Kildeer, Illinois, believes reshoring has generated 50,000 U.S. manufacturing jobs across all industries in the past three years, and could result in 500,000 new manufacturing jobs by 2015.
Moser developed cost-analysis software called “Total Cost of Ownership” (TCO), which is free to registered users at his website (www.reshorenow.org). This lets decision-makers evaluate the real price of manufacturing in China by comparing cost factors. He believes that if companies analyze offshore manufacturing with TCO, they will see savings based on product price evaporate.
One aspect of operations in North America that is influencing reshoring is the growing productivity of workers and efforts by companies to reduce costs. In March 2013, The Hackett Group released a study that states U.S. manufacturers in all sectors are targeting “an aggressive 1.5% reduction in cost of goods (COG) sold for 2013 … to drive margin growth.”
A major factor behind this is gains in internal manufacturing productivity, which could account for 50% of cost reductions. Hackett Group reports that outsourcing was “aggressively used” through 2011 by companies to reduce manufacturing costs. In 2011, the average COG reduction by companies was 0.3%. The shift away from outsourcing as a cost-cutting strategy and toward internal productivity began in 2012, when companies increased total cost-reduction efforts to 1.5% that year. If they are successful in reducing total COG by 1.5% in 2013, companies will have cut these costs tenfold since 2011.
Greater productivity, cost reductions and reshoring are also expected to increase export activity and add 2.5 million to 5 million U.S. jobs by the end of the decade, says Boston Consulting Group. In a study last year, the company stated that cost reductions and comparatively low prices for electricity and natural gas, could by 2015 give the U.S. an “export cost advantage of 5 to 25%” over Germany, Italy, France and the U.K., as well as Japan. This would result in the U.S. taking an export share of 2 to 4% from the European countries and 3 to 7% from Japan by the end of the decade. This could increase U.S. export revenue from these countries by $90 billion (€69 billion), and globally by $130 billion (€99 billion).
For almost 20 years China was touted as the future of manufacturing – Goliath on an unstoppable global juggernaut. Reshoring shows that a commitment to productivity and cost cutting, product quality and customer service is a better model for sustainable growth than a strategy based almost entirely on price.