Offshored jobs coming home?
The period of the 1990s up to 2010 saw many industries in the U.S. and Canada decide to move at least part of their manufacturing and distribution operations overseas, especially to China or other Asian countries. The reasons were numerous, and the effect was not helpful to the domestic economies in North America. However, there are indications that this trend of "offshoring" has slowed, and in some cases, operations that were moved overseas are being "reshored" — relocated back to their countries of origin. The reasons for this change are numerous, but the outlook is hopeful.
Some guesswork involved
Getting data on trends in offshoring and reshoring is challenging, and getting credible projections on possible future trends is impossible. Few industrial companies wish to give out data about future plant location or hiring intentions, so a lot of guesswork takes place. There’s little disagreement that there was a great flood of offshoring in the earlier years of this century. It is useful to consider some of the many reasons for offshoring, and consider whether they will apply as strongly in the future. Further, we can look at conditions in the U.S. and Canada to see if they might encourage returning industry.
An organization that is deeply involved in encouraging the return of offshored jobs to the United States is called Reshoring Initiative, founded by Harry Moser, former President of machine tool maker GF AgieCharmilles. Moser found it critical to form an industry-led initiative to demonstrate that offshoring is not always the best economic decision for U.S. industries.
Moser attributes the offshoring trend 2001-2010 to several influences: China’s low wages, compounded by currency manipulation; growth of the Internet and container shipping; companies’ strategies to cut to their core competence which did not always include manufacturing; locating plants based on labor price alone instead of total cost; consumer demand for the lowest product price regardless of origin and quality; high corporate tax rates; and a lack of adequate skilled manufacturing workforce in the U.S.
Labor costs a driver
Lower labor costs can be a powerful influence, particularly for industries whose products or services are highly labor-intensive, especially when extended labor training is not required. Examples of such industries might be assembling and packaging complex devices, especially where robotic assembly is not practical. In fact, labor costs in China, India, Mexico, Eastern Europe, and South America are often significantly lower.
In addition to access to lower cost and abundant labor, some companies have found significant incentives from overseas governments, at both the local and national levels. Government assistance might come in the form of labor recruitment and training, sites for plants, assistance in housing, favorable tax treatment, and outright grants and loans.
Getting closer to markets
Many North American companies have significant potential for current growing markets for their products in Europe, Asia or South America, and it is efficient to move part of the production stream closer to the market. This improved market responsiveness is sometimes coupled with the desire to move manufacturing closer to the sources of raw materials. An example might be furniture manufacturing, where it can make sense to build furniture at locations closer to where the wood, fabric and other components are produced, rather than shipping these materials to North America for manufacturing then returning them to an offshore market.
Spreading location risks
For some companies, another consideration is the desire to diversify manufacturing locations to spread the risk of catastrophic work stoppages from weather, earthquakes, floods, civil unrest, or any other event. This consideration is especially important for warehousing facilities, where access to effective surface transportation is essential.
Other reasons for offshoring have motivated specific industries, or certain companies. It might be their desire to get away from what is perceived as overly stringent environmental or workplace regulation, a wish to partner with specific overseas suppliers or customers, or to take advantage of certain currency or banking opportunities not available in the country of origin. Very commonly, companies have moved some but not all their manufacturing, warehousing or supply chain operations offshore.
Trend has shifted
In any case, in the period 2001-2010, the trend was strongly toward offshoring. We began to wonder if it would continue until there was no industrial base left in North America. In actuality, economists and labor force experts have noted that the offshoring trend has slowed. Some companies are bringing capacity back to the U.S. and Canada. Reshoring seems to be happening, especially in specific industries. There are certain reasons why this seems to be occurring.
Harry Moser attributes the reshoring trend to numerous changes: "Rising Chinese wages, increased use of total cost analysis, automation, general awareness of the costs, risks and strategic impacts that had earlier been ignored, and the U.S. advantage in natural gas and electricity costs."
Labor cost advantage fading
The labor cost comparison that favors China versus North America has diminished as Chinese labor costs are going up more dramatically than here. Also, some North American companies have a better understanding that labor cost encompasses more than the hourly wages. Consideration also has to be given to job training expense, communication challenges, and in some cases lack of a worker pool with adequate technical skills.
Moser and others have stressed the importance of considering the total cost of production in deciding between offshore and reshored facilities. In fact the Reshoring Initiative website includes a detailed calculator to help with this evaluation. This online calculator can be found here.
Moser states, "Our user database suggests that companies that decide only on price ignore about 23% of the total cost and that about 25% of what is offshored would return if companies used total cost instead of price."
Energy cost benefit for reshoring
As Moser points out, with increasing production of oil and natural gas in this country, there have emerged significant opportunities for production cost reduction through lower energy bills. This is especially important for industries where the labor component is not as important as natural resource and energy costs. Examples of this might be chemical, fertilizer, plastics, metallurgical and forest product industries. The relatively low and stable price of natural gas 2008-2015 has been particularly significant for Canada and the U.S. in their increasing abilities to hold and repatriate energy intensive industries. In 63 of the cases that Reshoring Initiative has studied, owners cite natural gas price and availability as influences on their decision to reshore.
Range of industries involved
Of the cases studied, the industrial classification that had the largest number of jobs involved was Transportation Equipment (33 cases), followed by Electrical Equipment, Appliances, Components (58), Computer/Electronic Products (25), Machinery (20), Apparel/Textiles (46), and Fabricated Metal Products (39). These six categories reported represented a total of 33,581 jobs. In general, Moser feels that the product types that make good candidates for reshoring are large, heavy products; those where rapid market response is needed, design changes are frequent, those that have a high reliance on intellectual property, those that are energy intensive, and those where generally higher labor skills are required.
The desire of manufacturers to locate some of their production near markets will probably remain as strong as ever, as will the desire to locate nearer the sites of raw material production inputs. Likewise the desire to spread the risk of plant shutdowns by forces outside the company control will continue to be a factor. But there clearly has been a reversal of the trend seen earlier this century. We are seeing significant changes from earlier trends, and it is one that all U.S. and Canadian manufacturers might profitably consider.
This article originally appeared in the Gas Technology Summer 2015 issue.