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The Reshoring of Manufacturing in the U.S.
Between 2000 and 2010 the U.S. lost a total of six million jobs in the wake of the global financial crisis, with manufacturing jobs falling from 17.3 million to 11.4 million. Since then, there has been a slight rebound in job numbers, with the manufacturing industry now exceeding 12 million, the first period of growth the industry has experienced since the mid-1990s.
Although offshoring still occurs, the U.S. is once again becoming an attractive and competitive place to do business and to manufacture, creating an increased sense of economic optimism. The signs of growth being experienced do present a positive outlook, however those gains have been small and there is limited data available to support the notion that manufacturing is returning home full scale.
The U.S. is no longer the expensive option when compared to China as the costs of labour and production in China are set to reach parity with the U.S. by 2015. From a logistical standpoint, the rising costs of transportation as well as the time it takes to ship internationally (this eliminates a company’s ability to rapidly deliver goods, or make adjustments to the order) makes moving many operations home increasingly sensible.
It also makes sense from a quality standpoint, as the U.S. ranks well in terms of global productivity and craftsmanship. The country has also discovered significant reserves of natural gas, increasing the cost effectiveness associated with production at home. New technology and the recent drilling boom in the U.S. have increased production 11 percent over the past two years.
The discovery of massive natural gas fields in Louisiana, paired with huge discoveries in Texas, Pennsylvania and Arkansas, mean the availability of an estimated total of 2 200 trillion cubic feet of natural gas. The volume of natural gas is predicted to be enough to satisfy U.S. demand, at its current levels, for a century – great news for energy intensive industries.
According to a survey conducted by the Boston Consulting Group, 92 percent of executives from large manufacturers believe that costs in China will continue to increase. In fact, 30 percent of imported goods from China are expected to shift production the U.S. over the next decade as 70 percent of U.S. based manufacturers found outsourcing to be more costly than originally anticipated. According to the survey, 50 percent of executives have plans or are actively considering reshoring their operations; 37 percent of executives with companies whose revenues exceed $1 billion were considering reshoring operations and 15.3 percent of executives cited actual plans to move operations home.
China is currently capable of producing mass numbers of simple products at an advantageous rate. Complex products require significant consultation and thus the need for additional time and travel for designers and project engineers who have to ensure critical specifications are met. Production that requires rapid responsiveness cannot be done from overseas.
But whereas the U.S. has the good fortune of bringing manufacturing jobs back, Canada is not likely to experience the same rate of growth although the U.S. may pull it along to some extent. Canada’s economy is still rather traditional, weaker in terms of productivity and innovation, and requires further integration into global supply chains to fully capitalize on cost efficiencies.
Canada’s two major industries, resources and housing, are running at the top of their business cycles which means the country needs to innovate and integrate in order to become more competitive and to grow. Canada does have the good fortune of robust natural resources and should be using them to their fullest potential. Its major issues, when appealing to the manufacturing industry, come from high wages and a strong currency, paired with a shortage of skilled labour.
Among U.S. companies that have plans to reshore or that have already invested in or shifted some or all operations to U.S. locations are Apple, Google, G.E., Boeing, Ford and Little Tykes. Other energy intensive industries, like steelmaking, are also investing heavily in the U.S., capitalizing on the large discoveries of natural gas but also positioning themselves in strategic geographic locations where there are shipping lanes by rail, land and water.
Many efforts are being made to disprove the misconception that manufacturing locally is not a viable option. Emphasis is being placed on the ability of reshoring to increase a company’s flexibility, quality and precision, improve shipping speed and decrease shipping costs, while better protecting intellectual property rights. Reshoring Initiative, a Chicago based not-for-profit, is actively trying to bring manufacturing and its many benefits back to the U.S. by assisting companies with cost assessments associated with outsourcing versus the costs associated with producing in the U.S. Its efforts are being made with the hopes of having an impact on the trade and budget deficits, helping to reduce high unemployment numbers, while decreasing reliance on imported goods, regaining jobs and strengthening the economy by emphasizing “buy local.”
Reshoring Initiative’s reshorenow.org website boasts the many reasons which make reshoring a viable option. Reshoring improves quality and decreases supply chain disruptions, which in turn decreases costs and improves both innovation and the bottom line.
Yet reshoring will only be a viable option if companies maintain low overhead costs (equipment costs for example). Extensive planning must be conducted to ensure staffing requirements are met; staff must be adequately trained in the ability to meet deadlines and demand and in providing beginning to end solutions for clients.
Successful reshoring also requires the commitment of every level of the government to minimize red tape. President Obama has stated a commitment to supporting manufacturing and reshoring efforts but, so far, there have only been words and no actions from either the Democratic or the Republican parties.
Some analysts believe that the U.S. needs to slash its corporate tax rate of 35 percent (the highest in the industrialized world) which could help alleviate the 20 percent difference in the cost to produce in the U.S. There is also the belief that more efforts need to be made in the areas of free trade, with Washington using regulations as a means of creating an environment where manufacturing could once again thrive.
Many problems can arise for companies that are planning on moving their operations home such as the need for prime locations (without causing environmental degradation in the process) and the lack of skilled workers. Otis elevators, for one, struggled with its reshoring efforts from Mexico to South Carolina in 2012 (2012 was to be the year the U.S. reached parity with Mexico). As a result of product delays on account of failed planning and execution of its plant transfer, both plants had to remain open. Otis took a solid hit, posting losses as a result. To solve this problem will require the coordinated effort of the government, businesses and schools.
Companies also must ensure inventory levels are maintained throughout the transition as well as ensuring staffing requirements and transport inventory are met in order to uphold client relations. When offshore contracts are being terminated, companies run the risk of disruptions and losses of resources (people, equipment and software).
Many companies have been outsourcing for so long that they have forgotten how to manufacture products, requiring further investment, training and development, as well as instituting a system for which institutional memory is not lost. But, although the process of reshoring seems rather complicated, in the long run it will be beneficial for companies, and the U.S. as a whole, to bring manufacturing back home.