Reshoring US Manufacturing: the Tools Are Here, the Time Is Now
Here's an investment opportunity whose time has come — and it's from an unexpected quarter.
There are many who decry the sad state of US manufacturing, especially in the face of seemingly invincible Chinese competition. But in reality, there are excellent reasons why both foreign and American firms should be investing in US-based factories that produce products for the domestic market.
One of the reasons is that the Chinese juggernaut is showing some signs of wear and tear brought on by rising costs and appreciating currency. Recent reports by the Boston Consulting Group and Accenture indicate that Chinese net unit manufacturing costs are rapidly approaching US levels. Chinese wages are rising about 20 percent/year. Chinese currency — the Yuan — is appreciating about six percent/year. This rise is expected to accelerate as China fights an inflation rate two to three times higher than the US.
Despite the rise in labor costs, Chinese productivity will continue to be far below US levels. By 2015, Chinese total cost of ownership (TCO) will be higher than for the same products produced in certain regions of the U.S., such as the southeastern states.
TCO is Key
To take advantage of this economic trend, major US and foreign companies need to accurately calculate their TCO. (TCO includes obvious direct costs such as price, plus all of the other costs — duty, freight, carrying cost, travel, etc. — that impact P&L).
Unfortunately, most company calculations are incomplete, primarily comparing prices rather than the entire costs of offshoring. Archstone Consulting's 2009 survey showed that 60 percent of manufacturers ignore more than 20 percent of the cost of offshoring. Accenture's 2010 survey confirmed the results with 61 percent of respondents acknowledging the need to implement TCO. As a result, companies have offshored more than is in their own self-interest.
There are those who suggest we abandon the manufacture of high-volume, relatively-simple products and focus on low-volume, high-tech products and processes. However, there are compelling reasons why we have to recapture many of the high-volume, relatively-simple products that have been offshored.
First, much of the high volume, simple work can be made with low labor content processes. Second, there is not enough of the low-volume, high-tech work to balance the trade deficit and reduce unemployment and the budget deficit.
One or more of the following must eventually happen:
Companies will develop a better understanding of the real costs of offshoring.
US manufacturers will learn how to be more cost competitive.
The US dollar will decline in value to the point where we are competitive — similar to the Chinese successful devaluation of the Yuan versus the US dollar by about 80 percent between 1980 and 1994.
Despite the strength, stability and rising productivity of the Chinese economy, the Yuan on July 12, 2011, was only back to 1993 levels and still 75 percent below the level of 1980.
(To read a complete SWOT — Strength, Weakness, Opportunity, Threat — analysis of the advantages and disadvantages of the typical American job shop in relation to SE Asia, click here.)
Others suggest we forget about manufacturing and instead focus on "innovation." However, recent studies show you cannot have the one without the other. Profs. Gary P. Pisano and Willy C. Shih of Harvard Business School recently reaffirmed that US innovation declines when manufacturing is offshored because the partnership of manufacturing and engineering is weakened. The non-profit Reshoring Initiative provides a TCO Estimator that includes a cost factor for this impact. It also provides a comprehensive total cost calculation that can objectively justify keeping manufacturing close to US engineering, a move that reinforces innovation while reducing costs.
The Reshoring Initiative helps US companies understand the true cost of offshoring — their total cost of ownership — and provides the information they need to rethink their manufacturing strategies. Given the obvious fragility of global supply chains and the fact that Chinese and other LLCC wages are rising rapidly, oil costs are soaring, and the US dollar is declining, this is the perfect time for US companies to reevaluate their offshoring practices and bring some of the sourcing home.
The Reshoring Initiative offers a non-protectionist, efficient way to reduce our imports, increase our net exports and regain manufacturing jobs.
The Reshoring Initiative provides:
Free total cost of ownership software that helps companies calculate the real offshoring impact on their P&L.
Publicity to drive the reshoring trend.
An online library of 98 articles about successful reshorings.
Access to NTMA/PMA Contract Manufacturing Purchasing Fairs to help companies find competitive US sources.
The Initiative has received increasing visibility and influence including recognition by Industry Week magazine via its 2010 Manufacturing Hall of Fame; inclusion of the TCO concept in Congressman Frank R. Wolf's (R VA) "Bring Jobs Back to America Act" (H.R.516); numerous webinars; dozens of industry articles; presentations in major industry and government policy conferences in Chicago and Washington, DC; and coverage by CBS, CNBC, WSJ, CNN, Fortune, and USA TODAY.
An integrated five-step Illinois Reshoring Initiative has been launched to demonstrate the Initiative's effectiveness. The initiative includes the Sept 8, 2011 NTMA/PMA Contract Manufacturing Purchasing Fair at which customers can find competitive U.S. sources. We anticipate improving profitability of participating companies while bringing "permanent" manufacturing jobs back at a cost of $1,000 each, less than one percent of the cost of a one-year Stimulus Program government job.
On July 22, I met in Washington, DC, with the Commerce Department's SelectUSA, which encourages FDI (foreign direct investment) and increased domestic investment by US companies. Select USA is quite interested in reshoring and explored the possibility of distributing Reshoring Initiative tools to economic development groups across the country.
Other developments at the Reshoring Initiative include:
TCO Version 5 was released with the capability to calculate costs from 17 countries.
We will make approximately 100 presentations nationwide this year: conferences, trade shows, company events, TV, radio, etc.
The Reshoring Library will expand greatly in detail and in number of articles by September.
A redesigned website will launch in August at the same URL: http://www.reshorenow.org.
Affiliated groups are being formed in the Midwest and in New York and New Jersey.
The Initiative now has 14 sponsoring groups including trade associations and companies.
We are considering a Washington, DC-based conference that would bring together reshoring groups and groups that either strengthen or are strengthened by reshoring. The groups might include: innovation, technology suppliers, environmental organizations, labor, and minority representatives.
Reshoring, compared to government spending programs and tax cuts, is the most cost effective way to stimulate the economy.
The current US trade deficit is about $550 billion/year. Balancing the trade deficit by reshoring, will:
Bring back about three million manufacturing jobs and four to five million multiplier effect jobs — the individuals who supply materials and services to the manufacturing companies and their workers.
Reduce unemployment from above nine percent to below five percent.
Dramatically reduce federal, state and local budget deficits by increasing tax revenue and reducing unemployment and other expenditures.
Strengthen our defense industry capability.
The basis for globalization, the effectiveness of Ricardian comparative advantage has even been called into question. Prof. David Autor of MIT and NBER has concluded that the total cost to our country for unemployment and other costs due to offshoring are about as high as the savings resulting from offshoring. We wind up with a hollowed out economy and no savings.
How You Can Help
Here are ways you and your company can help:
Large companies can improve profitability and simplify and de-risk their supply chain by reevaluating offshoring decisions using the Estimator.
Suppliers can use the Estimator to convince their customers to reshore.
Both the companies and suppliers can ask for help from the Initiative, propose local Reshoring Initiatives, and send me successful reshoring cases to be publicized.
Learn more at free reshoring webinars. Four are scheduled in August, including an Industry Week hosted Zurich America webinar on how reshoring can play a role in reducing supply chain risk management. Links are at the Initiative website.
Sponsor the Reshoring Initiative.
Working together, we can bring more manufacturing back now!
The Reshoring Initiative, is supported by: the Association for Manufacturing Technology (AMT); Sescoi; GF AgieCharmilles; the Association for Manufacturing Excellence (AME); the National Tooling and Machining Association (NTMA); BIGKaiser; Mazak; TCI Precision Metals; Science of Business; Doosan; the Swiss Machine Tool Society (SMTS); Hand Tools Institute (HTI); and IBS. Additional information on the NTMA/PMA Purchasing Fairs can be found at www.purchasingfair.com. Additional information on the Illinois Reshoring Initiative is at www.illinoisreshoring.org. The author can be reached at [email protected].