For decades now the U.S. companies have moved manufacturing jobs overseas, eroding the country’s dominance in manufacturing that dated back hundreds of years. Recently, in the face of higher transportation and fuel costs, increased wage rates and higher reject rates in developing countries, U.S. companies have rethought this move, bringing back some of their manufacturing to the U.S.
According to a study conducted by the Boston Consulting Group (BCG), more than a third of U.S.-based manufacturing executives at companies with more than $1 billion in sales are planning to bring back production to the U.S. from China. In addition, it found that by 2015 the U.S. would have a cost advantage over manufacturing goods export of 5% to 25% compared to countries such as Germany, Japan and the U.K.
There are real signs that onshoring, also referred to as reshoring, is happening. Case in point: Apple Computer. Last month, Apple CEO Tim Cook revealed that the company would invest more than $100 million to bring some of its manufacturing of Macs back to the U.S. from China. The Apple announcement was just one of several from major companies bringing manufacturing back to home ground.
In October of last year, Lenovo announced a similar move, bringing back the production of some of its PCs and tablets to a manufacturing facility near its headquarters in North Carolina. GE opened up new production lines in Kentucky to make appliances, the first new assembly line at the largely dormant Appliance Park in 55 years. The company will pump a total of $800 million to bring the facility back to life and up to speed.
Reasons fueling the trend
Some may think the reason behind this trend is due to the fact that U.S. consumers are increasingly buying products with the “Made in the U.S.A” label. Think again; it all comes down to sound business strategy. For one, labor wages in China have skyrocketed, shooting up 500% since 2000 and are expected to continue to climb 18% per year. Adding to that is natural gas prices, which have fallen so far in the U.S. that gas in Asia now costs four times as much.
Companies are also realizing the cost advantages of having their engineering and manufacturing co-located. Shipping components and products halfway around the world is costly and takes time, as does flying management to various locations to oversee production. There’s also the issue of miscommunication between production workers who speak one language and engineers who speak another that can adversely affect product quality.
Other compelling reasons behind onshoring include higher U.S. worker productivity, more flexible unions, the lack of IP protection in China, less supply chain disruptions, and companies wanting to be closer to their customers. According to the BCG study, the companies involved in the study cited that the top factors driving future decisions on production locations include: labor costs (57%), product quality (41%), ease of doing business (29%), and proximity to customers (28%).
Challenges that remain
Though governments—both local and national—are excited at the prospect of even more companies following this trend, there will have to be a significant investment in new assembly lines and workers for onshoring to work. The shift toward electronics and other high-tech products will require different production facilities and higher skill sets for workers than was previously required.
Governments and universities must partner to offer relevant training and courses for careers in manufacturing, and more companies must take it upon themselves to train—or in some cases, retrain—manufacturing workers.
Apprenticeship programs, which have had great success in Germany, have been shown to be effective ways to attract qualified workers. Many believe the German program, Dual Vocational Training System, is the reason behind why Germany now has the lowest jobless rate of any industrialized nation, around 7% or 8%.