As rising wages and increased transport costs cut into China’s manufacturing cost advantage and cheap domestic energy makes the US ever more attractive, US manufacturers, from blue-chips to SMEs, are starting to bring their operations back home from the East. Eleanor Wragg reports.
Over the past decade and a half, for any US company pondering where to locate its manufacturing operations, China was the default option. With its endless supply of cheap labour, undervalued currency and a government keen to roll out the red carpet for foreign investors by way of preferential tax treatment and incentives, the Asian giant quickly became the world’s factory – a trend which accelerated following its 2001 entry into the World Trade Organisation (WTO). Since then, and due also in part to technological advances in automation, America’s manufacturing workforce has fallen by almost a third, while the contribution of the sector to US GDP plummeted to around 12% by 2012, from almost 23% in 1970.
In the last few years, however, more and more companies are bucking the trend. Rather than source their products from, or offshore their operations to, Asia they’re increasingly doing the opposite: reshoring back to the US. From Caterpillar, which relocated the assembly of its excavators to Texas, to toy company WHAM-O, which brought back half of its Frisbee production to California and Michigan, companies are finding the US is once again the place to be. Even Chinese companies are moving to America, such as electronics giant Lenovo, which opened its first US PC plant in North Carolina last year, adding over 100 manufacturing jobs. But are these headline-grabbing relocations just hype, or could this be the beginning of the renaissance of US manufacturing?
China’s list of advantages that saw it topple the US as the world’s largest manufacturer at the end of 2010 is shrinking. Annual wage and benefit increases of up to 20% in Chinese factories cut into the savings gained from outsourcing, and according to the Boston Consulting Group, productivity-adjusted labour costs in China’s industrial heartland – the Yangtze River Delta region, which includes the provinces of Shanghai, Jiangsu, and Zhejiang – are expected to converge with those in the Sun Belt states of the US by about 2015. Companies with operations in China are also feeling the bite of rising transport costs as well as other annoyances, not least intellectual property risk.
Meanwhile, operations in the US are able to take advantage of ever-lower energy costs helped by developments in shale gas, an educated workforce, advanced technology and proximity to the vast US market.
“The economics of manufacturing are changing rapidly,” Walmart CEO Bill Simon said at the 2013 National Retail Federation BIG Show. “In previous decades, investment mainly went to Asia. Wages were low. The price of oil was low. And new factories sprung up out of the ground. But today, some of those investments are nearing the end of their useful lives, and manufacturers are making decisions about where they will invest next.” He added that as labour costs in Asia rise and oil and transportation costs become increasingly uncertain, the equation has begun to change, with some manufacturers reaching a tipping point.
“The US is in general becoming much more competitive,” says John Ahearn, global head of trade, treasury and trade solutions at Citi. “If you look at the cost and complexity of the supply chain, international logistics is much more complex. People are trying to do much more ‘just-in-time’ inventory, but when you have a long transit period from one part of the world to another it makes it more complex. If the human capital costs start to equalise and you can bring the manufacturing and the assembly closer to the end consumer, that brings pretty significant benefits and that’s what we’re seeing here,” he tells GTR.
Access to finance, a key factor for companies weighing where to base operations, is also becoming easier in the US. “As the global economy continues to strengthen, exports are being financed not only by commercial banks but also by capital markets. This is an encouraging trend.
In 2013, the total dollar amount of transactions financed by US Exim was significantly lower than in 2012, yet US exports as a whole were up during that time period,” says Fred Hochberg, chairman of US Export-Import Bank (US Exim).
“There is kind of a mini-renaissance going on in manufacturing,” agrees IHS Global Insight analyst Tom Runiewicz, who believes that this trend is set to accelerate. “The shape of manufacturing has changed. It’s not a one-dimensional labour issue anymore.”
According to the Reshoring Initiative, an industry-led effort to bring manufacturing jobs back to the US, manufacturers haven’t always taken into account all of the costs involved in sending their manufacturing offshore, such as inventory-carrying costs, travelling costs to check on suppliers, intellectual property risks and opportunity costs from product pipelines being too long.
The growing popularity of home-based productions isn’t just about the bottom line for US companies. It’s also about public opinion. In 2012, designer Ralph Lauren was hit by a US-wide wave of criticism when it was revealed that Team USA’s Olympic uniforms were actually made in China. The outrage was such that it prompted Congress to introduce an act requiring all uniforms going forward to be American-made. As a result, the apparel sported by America’s athletes in Sochi this year was hand-stitched in Southern California. And when a PNAS study showed in January that big increases in West Coast air pollution can be traced right back to the factories in China making goods for export to the United States – it is estimated that a staggering 24% of California’s daily sulphate concentrations come from Chinese smokestacks – environmentalists also added their voices to those clamouring for production to be brought back home, where there is stricter legislation around emissions.
As all of these factors converge, supply chains are gradually shrinking because large companies are swiftly followed by their suppliers and partners back to the US.
Last year, Walmart said it would buy US$50bn more in American-made goods over the next decade than it does now, and in January, at an audience at the US conference of mayors meeting in the nation’s capital, the company said it would set up a new US$10mn fund to encourage innovation in American manufacturing. Buoyed by Walmart’s proclamations, one supplier, New Jersey-based Kent Bicycles, which moved its entire manufacturing outfit overseas in 1990, says it will now bring production back to South Carolina. According to Kent, when at full capacity in 2016, it will have added at least 175 jobs and will be assembling 500,000 bikes annually. The company expects to start production in autumn this year.
But it’s not just Kent Bicycles that thinks reshoring makes sense. A poll of Walmart suppliers found that 72% believe manufacturing in the US will be cost-favourable within four years or less.
Reeling them in
The US government is keen for the trend to continue. Speaking in 2012 at the State of the Union address, President Obama said American manufacturers should receive preferential tax treatment, adding, “if you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers”. Committing political capital to the cause, he said one of his second-term priorities would be “making America a magnet for new jobs and manufacturing”.
Meanwhile, US Exim is also working to make conditions more favourable for America’s SME exporters as they compete with the East. Last year, US Exim authorised more than 3,400 small-business transactions, which constituted nearly 90% of the bank’s total transactions and was the highest level of small-business transactions in a single year in its 80-year history. “US Exim supports US exports in international markets and levels the playing field
for American manufacturers,” says Hochberg.
“We assume commercial, country and liquidity risks that are currently beyond the still-recovering risk appetites of private-sector lenders.”
Companies that come back to the US talk of a first-mover advantage, getting in there first before the competition to take advantage of proximity to the market. They’re also saving themselves and their customers money: GE, which brought production of its GeoSpring Hybrid Water Heater back to the US from China, says that not only can the new product now be made more competitively in the US, but because of more advanced technological know-how, it has “an enhanced feature set, offers better performance with greater energy savings and will be more affordable for consumers”.
According to PwC, the US shale gas boom, which has seen natural gas prices fall to a third of the cost in Europe and a fifth of the cost in Asia, could lead to an increase of 1 million manufacturing jobs by 2025, as well as lower feedstock and energy costs.
“A lot of the products now that are being onshored or reshored are not the consumer items that we normally see,” says Runiewicz at IHS, “but they include steel and non-ferrous metals and fabricated metal products, which is energy-intensive production line work that’s done with technicians rather than unskilled labour.” He also points to the transportation equipment industry, and cars in particular: “You have Toyota, you have Honda, you have BMW all assembling
motor vehicles in the US.” Meanwhile, French company Airbus are currently building an aircraft plant in Alabama, with production scheduled to begin in late 2015. “We’re seeing a lot of manufacturing coming in from foreign companies that are looking to invest and produce in the United States,” adds Runiewicz.
Closer to home
More than half of US-based manufacturing executives at companies with sales greater than US$1bn are planning to bring production back to the US from China or are actively considering it, according to a survey by the Boston Consulting Group. It says that 54% of executives are considering or planning to reshore, up from 37% in a similar survey in February 2012. The top three drivers were labour costs, proximity to customers, and product quality, followed by access to skilled labour, transportation costs, supply-chain lead time, and ease of doing business.
Manufacturing sectors that are ripe for reshoring tend to be the larger, more complex capital equipment, which require a ‘whole-system’ approach to produce and assemble, while their bulk means that shipping costs are a factor.
However the US is not uniformly competitive across sectors and has a comparative disadvantage when it comes to high-volume, high labour content, low-skill and low-cost to produce and ship products, such as textiles. These probably won’t be coming back any time soon, although as China loses its sparkle, manufacturers are on the lookout for alternatives.
It’s not all plain sailing though. Replacing the skills and knowledge lost a generation after manufacturing jobs left US shores, won’t be easy. According to the MIT Forum for Supply Chain Innovation, which surveyed US manufacturing companies to find the barriers to bringing operations back home, corporate tax reductions, tax credits and R&D incentives will also be needed. However, over a third of that survey’s respondents stated that they were considering bringing manufacturing back to the US.
As the US-Asia wage differential becomes more competitive, it’s not just manufacturing that makes sense to bring back. In an internal Citi analysis, the bank looked at the cost of offshoring some of its operations into India versus moving into some of the older rustbelt cities of the US. “The cost arbitrage between Tampa and India has become much, much closer,” says Ahearn. “Citi also has a very large operation in Buffalo… it’s just as cost-effective to run those operations as it would be to run them in Mumbai or Chennai. The cost bases have come a lot closer and we find that the talent pool is probably equal at this point.” He also cites employee churn rates as a factor: “One of the problems we have when we look at places like India is we have incredibly high attrition rations because workers will change employers for US$20 more a week in a very hot economy. We don’t have the same attrition levels in a place like Buffalo.”
Far from being merely anecdotal, the return of manufacturing to the US is a quantifiable trend, albeit a nascent one. “We’ve seen a shift in our supply chain finance business in that many of our large corporate buyers are sourcing from US suppliers,” says Ahearn. “One of the things that we have seen is that the growth in our domestic supply chain finance business is growing faster than our Asian business, which is a reversal of a previous trend. It’s not a dramatic statistical difference, but it clearly is the beginning of what could potentially be a larger trend.”