Reshoring helps drive the manufacturing renaissance

The U.S. is showing early signs of a manufacturing renaissance with reshoring and foreign direct investment (FDI) playing an increasingly important role. In 2014, jobs from reshoring and FDI continued to grow and together more than offset offshoring, adding net about 10,000 manufacturing jobs in the U.S. Reshoring and FDI are still relatively small but contributing to the renaissance.

Between the health of the industry overall and the balancing of the job flow, the beginnings of a manufacturing renaissance are evident, but many actions are required to maintain the momentum. We need continuous improvement in operations and in sourcing decisions to make domestic production the clear first choice in more cases.  First, there must be continued corporate investment in lean, automation and skills training to improve our competitiveness. Second, government action to make the U.S. more competitive: skills training, lower nominal corporate tax rate and end of offshore currency manipulation.  Third, consistent, disciplined use of Total Cost of Ownership (TCO) analysis so companies recognize that domestic manufacture is in most cases their best choice.  Finally, thorough reporting on reshoring success stories so that corporations realize that reshoring is worth reevaluating and investing in and so prospective skilled workers realize that their best career opportunities might again be in manufacturing.

Reshoring and FDI are both motivated by the same thing: the financial advantages that companies achieve by producing near the market.  GE brought back appliances because of the savings from supplying the U.S. market from Kentucky instead of from China.  Toyota has built assembly plants here because of the savings versus importing from Japan or from other countries.  The only major difference is the companies’ locations for headquarters.  Because the U.S. is the world's largest consumer market, it is attracting manufacturing by U.S. and foreign companies that want to be customer responsive, cut their total cost and maximize profitability.

The positive trend in overall manufacturing employment is consistent with an incipient renaissance.  Manufacturing employment in March 2015 was up 866,000 since the Great Recession low of February 2010.  Some would claim that improvement is a normal or even below-normal recovery.  A deeper analysis shows that manufacturing employment is higher than a regression forecast based on historical manufacturing employment trends would suggest.  The Reshoring Initiative projected current manufacturing employment based on several ranges of years in the past two decades to see how we are actually doing despite the recession, continued productivity improvement and offshoring.  All of the samples proved highly positive.  For example, a regression based on 1997 to 2007 employment, thus leaving out the Great Recession and years since, projects 2015 employment 2 million jobs below the March 2015 actual level.  At the macro level, we are beating the trend!

Offshoring

Offshoring was driven primarily by companies seeking to reduce their manufacturing cost via low-wage production.  They typically safely ignored the “total cost” because the wage gap was so large.  As the wage gap, especially with China, has rapidly closed since 2000, quantifying the other costs, risks and strategic impacts, has become increasingly important.  A list of such factors is shown in Table 1.

Table 1. TCO cost factors

Some companies started producing in China to enter the 1.3 billion person Chinese market.  For many, this was a good decision.  Increasingly, however, companies are finding that China is not as hospitable as it seemed 15 years ago.

Some Reshoring Cases

Some AME member companies have experienced the benefits of reshoring. AccuRounds reshored precision high-tech metal products from China and Europe to Avon, Massachusetts. They cited delivery, freight cost, IP risk, rising wages, labor concessions and U.S. energy prices as reasons for the return to the U.S. They have doubled their workforce over the last decade and reported that their customers are reshoring.

The benchmark case of reshoring is GE Appliances in Louisville, Kentucky.  GE had been outsourcing appliances in China.  They brought in sample product and had a team of design engineers, manufacturing engineers, foremen, assemblers and suppliers come up with a better design.  When they were done with the water heater, the thermal efficiency was improved, warranty costs were reduced and, even though their U.S. wages are four or five times as high as at the Chinese supplier, the Made in U.S. product sells at retail in the U.S. for 20 percent less than the product that had been imported from China.  The Chinese ex-works price was still substantially lower than that for the U.S. product, but a correct accounting showed GE that it could sell the U.S. product for less, demonstrating the importance of deciding based on total cost.

The Reshoring Initiative has data on close to 1,000 companies that have chosen to produce locally over offshore, including a broad range of company sizes and products. The largest move yet is by Walmart, which has committed to buy $250 billion of additional Made in USA products over 10 years (2013-2022). The Reshoring Initiative estimates that the $50 billion/year increase in the 10th year will create about 300,000 U.S. manufacturing jobs, about a 2.5 percent increase.   Manufacturers interested in offering Walmart a Made in USA product can do so at Walmart JUMP.