Manufacturing in the United States is mounting an unlikely comeback. In fact, it’s leading our steps toward economic recovery. This year, manufacturing is expected to outpace growth of the overall economy. One part of this trend is the fact that more businesses are deciding to produce domestically.
Several companies have recently made news for locating their manufacturing operations here: a high-end watchmaker called Shinola set up shop in Detroit, Google sourced production of the Nexus Q in Silicon Valley, and European aircraft manufacturer Airbus announced they’ll be opening a massive plant in Alabama.
This is great news, and there’s a parallel trend taking place: reshoring. Companies that once sent production overseas are bringing it back. Why is this happening, and how can we continue the momentum?
Why Companies Are Coming Back
In January 2011, I reported that a small number of manufacturers were bringing production back home. At the time, the trend of reshoring was just starting to take hold, and that trend seems to have continued unabated.
Much of it has to do with China. Low labor costs were of course what brought so much manufacturing to China, but China’s attractiveness may be waning. Chinese labor costs are expected to increase 13 percent per year through 2015. Concurrently, the cost of shipping products around the world is increasing.
Intangible factors promote reshoring, too. For instance, distance and cultural boundaries can make collaborating on design and engineering challenging; lengthy lead times can complicate supply chain management; and, protecting intellectual property (particularly in China) is a nightmare for some manufacturers. These kinds of indirect costs are often underestimated when manufacturers choose to offshore production.
Other factors related to America’s economic downturn are driving reshoring, too. City and state governments are more willing to provide tax breaks and other incentives to open domestic manufacturing facilities, and a renewed sense of pride in the “Made in USA” label is generating goodwill for manufacturers.
Seven Industries Nearing A ‘Tipping Point’
According to the Boston Consulting Group, seven industries (see chart below) are approaching a tipping point–still five years away–at which it will be economically viable to produce their products domestically instead of in China.
These products are good candidates for reshoring because they require a low labor content to produce (making cheap labor less important) and are relatively heavy, meaning they’re increasingly expensive to ship. Together, these imports amount to $200 billion worth of goods that may be reshored.
Sources: 2012 U.S. National Census Bureau; U.S.Bureau of Economic Analysis; Boston Consulting Group
Harry Moser, Founder of the Reshoring Initiative, echoes this sentiment saying that proponents of reshoring need to target industries with a low labor content relative to their product price so cheap labor isn’t as important. Don Norman, Senior Economist at the manufacturing research group MAPI, agrees. As he says, “our competitive advantage today centers around heavy capital goods with complex processes that require the aid of technology.”
Three Companies That Made It Happen
With this framework in mind, I set out to find a few examples of companies making it happen. These three companies represent a nice cross section of the motives for reshoring.
In my conversation with Mitch Free, CEO of the online manufacturing marketplace MFG.com, he mentioned that Hurst–the company that makes the Jaws of Life– recently reshored all their production from China. The primary reason, according to Free, was that Hurst had difficulty ensuring product quality due to unreliable suppliers.
Since Hurst’s products are used in life and death situations, quality control is a major issue. So when Hurst started getting returns of defective products, they turned to domestic suppliers with which they could more closely collaborate on engineering. The payoff: significant quality improvements.
This year, General Electric decided to move production of its water heaters from China to Kentucky. Like Hurst, GE moved back partially because it allowed them to collaborate more closely with suppliers. Meanwhile, supply chain issues–such as the inability to coordinate short delivery times–made it difficult to keep production overseas.
Although GE’s labor costs in China were 30 percent lower than in the U.S., the labor savings were eaten away by an inability to carry the appropriate inventory levels as well as inconsistent delivery schedules. As a result, the 30 percent labor savings turned into six percent higher costs.
Peerless-AV originally made its audio-visual mounts in Illinois but, like many others in its industry, eventually decided to offshore some production to China. They soon found themselves spending seven figures in legal costs to fight knock-off products.
As a result, Peerless decided to move production back to Aurora. They’ve been able to reduce carried inventory by 20 percent, better protect their intellectual property, and bring products to market faster.
How to Propel the Trend Forward
These examples are encouraging for those in favor of domestic manufacturing, but reshoring has yet to move from a trickle to a trend. Free noted that “it takes time for the mindshift to happen.” It is beyond the scope of this article to present detailed solutions on how to accelerate this mindshift, but Free, Moser and Norman agree that three key pillars are:
- A more educated workforce to fill skilled labor gaps, and more Americans interested in careers in manufacturing at all levels (e.g., assembly, engineering, management, etc.).
- More extensive use of automated assembly processes to limit the labor input of production.
- Tools to help companies evaluate their true total cost of ownership (TCO) when offshoring to model all costs and risks.
It’s time for manufacturers to start re-evaluating whether it’s worth producing overseas. I believe that we need to reaffirm our commitment to manufacturing and continue producing products here.
Thumbnail created by Los viajes del Cangrejo.