5 Financial Factors Driving the Growing Reshoring Movement for American Manufacturers
There is no question, as more and more stories about the reshoring movement bubble up to mainstream news, that the state of global manufacturing is in flux and that long-held assumptions about the costs and expenses in manufacturing should no longer be considered accurate. Due to a variety of factors including cost and availability of materials, climate change, and disputes on the rights of workers, American manufacturing may soon be a far more American enterprise than it once was. In fact, the US has now surpassed all countries but Mexico, India, and the Netherlands in cost savings potential for manufacturers.
Several years ago, President Obama is reported to have asked Steve Jobs what it would take to bring lost manufacturing jobs back to America. Steve Jobs is said to have responded that there was no way that those jobs were ever coming back. At the time, Jobs’s assertion was based on good evidence: it had long been more economically efficient to outsource manufacturing to other countries, and there was no indication that that would change. Now, due to factors that Jobs would have been unable to foresee, manufacturing now looks very different from what it was just a decade ago:
1.) The changing status and laws on labor in other countries has drastically impacted the costs of exporting labor, adding to the reshoring movement: In past years, China offered significant savings over American factories because labor in China was so much less expensive. However, since 2005, wages grew at a much higher rate for Chinese jobs than for American jobs. Over the course of the last decade, this along with the growing value of the yuan has led to an increase in manufacturing costs in China of 187% compared to an increase of only 27% for the cost of American manufacturing. Throughout the rest of Asia, wages increased by an average of 7.1-7.8% between the years 2000 and 2008. As a result, wages throughout Asian markets now match or exceed American wages as the market crisis actually produced a drop in average wages for factory employees by 2.2% since 2005.
2.) Affordable options in automation even out the playing field among American manufacturers: Recently, Bill Gates noted that the proposal to increase American minimum wage would likely cause many manufacturers to rely more heavily on automation. As wages likewise rise in other countries, manufacturers turning away from offshoring and joining the reshoring movement can find significant cost savings by investing in automation. And in terms of productivity, investing in automation saves manufacturers money within the first year as a single machine can increase productivity by as much as 70% while only costing as much as a single employee’s salary for one year. Regardless of the concern that automation costs jobs, the savings potential of the technology nearly necessitates that manufacturers consider it as a valid option. This trend of “botsourcing” has already made some major impacts on the world of manufacturing: Foxconn recently announced their intent to join the reshoring movement by investing $40 million on a largely automated facility in Pennsylvania, while Amazon recently spent $755 million to purchase Kiva Systems, a manufacturer of warehouse robots.
3.) Environmental standards and energy costs change the expectations placed on manufacturers: Because of the new availability of shale in America after 2005, it has become cheaper for American manufacturers to depend on energy produced here at home. According to the most recent PwC report, as many as 87% of CEOs in industrial manufacturing consider the environmental impact of their operations to be a point of major concern, while 70% also stated that volatile energy costs represented a serious issue. While in some ways, this simultaneous interest in cheap energy as well as environmental protection is contradictory, each of these inclinations would make manufacturing at home in the US a better choice, literally fueling a large portion of the reshoring movemet. Locally produced energy has become cheaper and so manufacturers can eliminate the environmental cost of transporting goods overseas. In addition, in the US manufacturers face more stringent requirements from the Environmental Protection Agency, which means that operations performed at home are more likely to correspond to accept regulatory measures. While in the past these strict requirements may have led some manufacturers to move labor overseas, the increasing number of manufacturers who are aware of the importance of curtailing the environmental impact of their operations may mean that they are less deterred by the requirements of the EPA to keep operations in the US.
4.) Lacking regulations on intellectual property rights and on worker safety impact how American manufacturers invest: After last year’s Savar factory collapse, many consumers and legislators called for improvements in working conditions and safety regulations for workers in factories supporting outsourced American operations. While some manufacturers continue to resist legislative intervention in their safety regulations, many manufacturers were motivated to change the ways in which they select factories and materials providers. Similarly, as many as 58% of manufacturers say that the lack of enforcement of intellectual property rights in China and other countries is a major detractor for doing business in those countries. For both American consumers and manufacturers, lack of enforcement of these kinds of regulations are often seen as unacceptable, and like most great social causes which started in movements by doing good, so is the reshoring movement.
5.) Both consumer and supplier opinions are evolving: According to marketers today, customers are now likely to express a greater interest in purchasing goods that were made locally, by hand, on a smaller scale, with lower environmental costs, and in ways that are more sustainable for the American worker. In fact, as many as 80% of consumers say they would pay extra for goods made in America. Whether or not some may find these ideas too trendy or reliant on buzzwords, many manufacturers are paying attention. In fact, lots of manufacturers agree with consumers that goods made in this way are more likely to be of higher quality (consider Toyota’s controversial decision to replace robots with more trained craftsmen). This has led to the concept of “artisanal manufacturing,” a practice that, if more broadly embraced, could lead to significant decrease in the environmental impact of manufacturing, as well as to an increase of jobs based locally in the US.
Manufacturing in America as opposed to manufacturing in China now only represents a 5% difference in cost, a massive decrease from price differences in the past. For those manufacturers continuing their operations overseas, developing financial changes at home and aboard coupled with the added cost of transporting goods to and from overseas locations will likely make the value of investing in reshoring and joining the reshoring movement a practical financial reality.
Other factors to consider in the discussion of the Reshoring Movement
Though it seems likely that the reshoring movement is more than just a fad (as the numbers suggest many major names in manufacturing are already reshoring or “near-shoring” operations to Mexico and other countries and territories), there are other factors that are worth considering when gauging what this trend means for the future of industrial manufacturing.
- The controversy over the legality of fracking: The recent availability of American shale has been a driving factor in the switch to American energy. However, as disputes over fracking and related extraction methods continue, it’s unclear how available or affordable these resources will remain.
- Some manufacturers resist strict regulations in America: As noted above, while many manufacturers respond positively to regulations meant to improve safety and environmental standards, some manufacturers resist these changes because they usually result in extra expenses. Re-shoring work to America means manufacturers are more likely to face these kinds of regulations.
- Questions over the wisdom of an excessively consumerist culture: After the collapse of the Savar garment factory, critics wondered whether or not American consumers would be willing to give up their ready access to cheap, disposable clothing to ensure that no such similar accidents occurred in the future. The numbers indicate that many people continue to demand these cheap goods, regardless of the true human cost. The increasing demand for small-batch, high-quality goods will be a boost for local production, but could also be a step towards the popularizing of a more minimalist lifestyle that places a smaller demand on major manufacturing operations. However, as the greater effort invested means a more expensive product, there could be some type of evening-out for any profits lost.
- The rising power of China and the uncertain value of the American dollar: As many have noted, China is a developing world power with the potential to impact manufacturing and consumption on a global scale. Coupled with the fluctuating value of the American dollar over the last years, it is unclear where American manufacturers will develop next to the developing manufacturers of China. According to some, it is no longer applicable to think of manufacturing as something to be concentrated in certain areas. This changing global picture may underscore this point.
What are your thoughts on the reshoring movement? Good for the economy? Only a short term buzz word? Here to stay? Chime in in the comments below!