Homeward Bound: Reshoring's Shaky Momentum | Elementum

Homeward Bound: Reshoring’s Shaky Momentum

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Making Waves

Walmart has announced that it plans to add 1 million jobs to the United States by investing $250 billion in U.S.-manufactured goods over the next decade. The retail giant cited a shift in consumer sensibilities and an opportunity to boost revenue as the biggest factors in their decision – adding jobs will increase disposable income, and with more consumers willing to pay more for domestic-made goods, both Walmart and their customers should reap the benefits. But Walmart is not alone in its move towards “reshoring” jobs, moving factories back stateside after a decade-long exodus to cheaper manufacturing facilities in places like Southeast Asia. Last year’s record gain of 10,000 jobs in the U.S. may suggest a general increase in reshoring, which is good news for the job market and a potential signal to manufacturers that moving manufacturing to the U.S. may be beneficial. But is the reshoring trend here to stay?

In trying to dig deeper into the trend’s trajectory, things get muddy. However, for the first time in recent years, there are concrete financial benefits to reshoring, which may be fueling the influx of companies. Across a large number of industries, companies are reshoring factories and citing cost as their primary reason. Why the change? Labor abroad is no longer drastically cheaper than labor in the United States, especially in Southern states, where job creation is the highest. Many tax incentives offered by China to foreign companies are expiring, which to many signals a good time to leave the country. In addition to labor costs, cheaper energy sources have become available with the recent boom in shale gas and oil. Manufacturing technology is improving in the U.S., allowing for more automation and higher efficiency. More than job creation, companies are looking for efficiency in creation and transport. The United States is looking like a better bet for those desires.

Easing Up Congestion

In the past, offshoring has presented a number of headaches. In an interview with The Economist, Harvard Business School’s chair of the Strategy Unit, Jan Rivkin, asserted that U.S. companies find many hidden costs once they decide to offshore. While the cost of labor seems low, companies “have had to hire more employees because of lower productivity levels and the need to invest in staff training.” With the cost of labor increasing in China, transportation costs begin to bear heavier on these companies. Increased traffic in shipping, rail, and road will likely mean more congestion and delays in coming years, at least until countries can innovate and mitigate congestion (see our articles on shipping congestion and China’s freight rail).

Large corporations across a number of industries are pledging to move their manufacturing back to the United States. Medical device production is increasingly becoming centered in the U.S., with companies aiming to avoid patent infringement and unregulated manufacturing, both issues they have faced overseas. The auto industry, too, is moving away from overseas manufacturing. This month, Volvo announced plans to open a plant in the United States. Commercial real estate analysts CBRE Group stated that “Both slumping sales and increased production costs in China, along with the growing complexity and risk of an Asia-to-U.S. supply chain, have forced manufacturers to consider reshoring a large portion of the production”. In response to Walmart’s reshoring efforts, General Electric is producing domestically made lightbulbs for the chain. The company has also moved manufacturing of washing machines, refrigerators, and water heaters from China to Kentucky. Apple, too, has pledged to manufacture its Mac Pro computers domestically, citing wage increases in China and the financial advantage of assembly near the end-market as two reasons for reshoring.

Sweet Home Alabama

The Reshoring Initiative Data Report, a study conducted in 2014, looked at regions of the United States that added jobs from 1997 – 2014 (most added jobs, however, are from 2010 – 2014). The American South is leading the way in reshoring jobs, with relatively low-cost workers and proximity to increasingly busy transportation hubs. Harry Moser, founder and president of the Reshoring Initiative, stated that “Even though wages are higher, companies eliminate shipping costs, import duties, and other expenses associated with offshore manufacturing”.

The cost of reshoring may also be offset by consumer choices. A 2013 survey for “Made in the USA” found that more shoppers prefer “Made in the USA” products because they are perceived to be of higher quality and thus consumers are willing to pay more. Similar to consumer trends in the food industry, more and more Americans are taking a conscientious look at their purchases, wondering about the environmental and human impacts are to what they choose to buy.

What the Future Holds

Given all that information, it would seem that a reshoring trend is about to take off in the U.S. But don’t expect those 1 million new jobs just yet. Rather than a continuous increase in reshoring, most analysts agree that the U.S. will see a rebalancing in the future. While it is cost effective to move small aspects of their production to the United States, companies like Walmart will still rely on Chinese manufacturing for a large portion of their labor. And while reshoring is popular with a few companies, it is not happening on a large scale. Rather, companies that rely on technology and industries that use cheap natural gases will have an easier time successfully achieving offshoring. Companies with strong foreign demand will be less likely to reshore, as transportation costs would skyrocket. Many companies are choosing to “nearshore”, bringing manufacturing to Mexico and Canada, where labor is cheaper but transportation costs are not nearly as high. You can read our article about the near-shoring trend here.

It is also important to consider the possible implications of the Trans Pacific Partnership (TPP) passing, which would likely decrease offshoring costs and make importing goods to the U.S. much easier. If the agreement passes, which appears likely, many industries may be inclined to continue to offshore jobs and produce goods overseas.

Though reshoring has benefits for some, like all supply chain models it should not be considered a one-size-fits-all solution: the move is industry- and company-specific. However, for the time being, the recent moves towards reshoring by various companies signal a change in the way consumers choose and may mitigate the problem of increased shipping congestion.

Elementum News Desk

Elementum News Desk


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