Supply Chain Commentary: Manufacturing Returns to the U.S.
Despite being one of the oldest job sectors, manufacturing is experiencing an interesting reversal.
Chinese companies are now moving manufacturing jobs to the United States at an accelerating rate, with job investment in the United States tripling in one year to $45.6 billion, according to the Rhodium Group. Chinese manufacturers are plagued by wages in China that are increasing by 15 percent per year, high taxes, and expensive and slow shipping.
Chinese companies aren’t the only firms recognizing the value of U.S. manufacturing opportunities. According to The Boston Consulting Group report, “Reshoring of Manufacturing to the U.S. Gains Momentum,” manufacturers with at least $1 billion in annual revenue plan to add more production capacity in the United States, between 2016 and 2021, than they do in China. Over the past few years, there has been a notable trend of companies bringing U.S. manufacturing operations back from other formerly low-cost countries, effectively reshoring these operations and jobs.
There are a number of reasons why a business would consider moving jobs and opportunities back to the United States. While political pressure may play a role, many companies are reshoring due to considerations around cost, quality control, intellectual property protection, and tax benefits.
Further, the recent expansion of the Panama Canal has opened new opportunities for U.S. manufacturers with the changing supply chain dynamics of international trade.
Here are four reasons why companies would consider reshoring opportunities:
The New Cost Equation
Cost has traditionally been the primary consideration for offshoring. For years, China, in particular, delivered significant cost-saving, compared to manufacturing in the United States; however, labor costs in China have increased significantly over the last decade. In contrast, U.S. labor costs have remained stable for the past 20 years.
According to the Oxford Economics research paper titled, “Made in China Not as Cheap as You Think,” labor costs adjusted for productivity in China are only 4 percent cheaper than in the United States. When manufacturers account for shipping, packaging, executive travel, and freight costs, as well as significant U.S. tax incentives for manufacturing in the United States, the savings of manufacturing in China and other countries diminish.
Focus on Quality
Quality standards in traditionally low-cost countries have improved, but they can still be inconsistent. While many manual labor positions will likely remain in foreign countries for the near future, U.S. companies are considering reshoring for skilled labor.
Intellectual property (IP) protection is another important factor for manufacturers in highly skilled industries. The United States maintains a gold standard in protecting IP, and manufacturers doing business in the United States worry less about patents being illegally replicated than they do when manufacturing offshore.
Changes in Supply Chain Dynamics
The expansion of the Panama Canal in June 2016 is bringing new opportunities to manufacturers, as it more than doubles ships’ cargo capacity. The new third lane can accommodate ships carrying up to 14,000 containers, compared to the previous 5,000 containers. This opens a lot of exciting opportunities for manufacturers, including the potential to source raw materials abroad for manufacturing in the United States. At the same time, the increased capacity allows U.S. manufacturers to reach customers in international markets by shipping finished goods from the United States.
In addition, there are other new transportation technology and infrastructure investments being made that are making it faster and easier for U.S. companies to get raw materials and ship finished goods. For example, the rise of “smart” cities – with large sensor networks, delivery drones, and driverless cars – can further improve connections to customers and suppliers.
Boosting profits while reducing risk
Bringing manufacturing back to the United States allows companies to tap into a vibrant financial market and raise the necessary capital for production. This is further reinforced with historically low interest rates and inflation. With changing cost dynamics, focus on consistent quality, and new supply chain opportunities, the United States is becoming an increasingly attractive base for manufacturers.