Increasing labor costs abroad and total-cost-of-ownership models are driving new thinking on sending production overseas.
By: Jason Tuma, CPA
There are a multitude of reasons why the number of U.S. manufacturing jobs has decreased by the millions in the past decade, but a favorite villain is offshoring — replacing goods made by relatively highly paid Americans with the same goods made by foreigners earning significantly less. Asian countries benefited greatly from this trend early in this century. Now, we’re seeing a bias toward bringing some of those jobs back to the United States. Instead of offshoring, manufacturing leaders are reshoring as a way to become more competitive.
Harry Moser, a retired machine-tool manufacturing executive who now runs the Reshoring Initiative, is a leader in this trend. Moser travels the country to speak about reshoring, works with individual companies to evaluate sourcing options, and maintains a Web site with costing tools that companies can use to objectively calculate total cost of sourcing. The Reshoring Initiative (www.reshorenow.org) does not promote protectionism. Rather, its aim is to educate OEMs and suppliers about how much it really costs to buy goods that have been manufactured overseas that ultimately will be sold in the United States.
Much of the offshoring that happened a decade ago shouldn’t have, Moser said, because executives were copying the competition rather than making objective, informed decisions.
“For years they followed the lowest labor costs; a herd instinct occurred,” Moser said. “There were lots of cases of CEOs who would have a bad quarter and then announce to Wall Street that they were going to offshore one third of their production.”
How much reshoring is going on?
No one has a definitive answer on the number of the jobs that have returned, but ample evidence points to an increase, including publicly announced plans by large companies to return existing jobs and keep new job growth at home.
Two drivers are behind this, the first being a realization that sourcing overseas has inherent risks and logistical and operational requirements that can offset labor savings by driving up costs for inventory, transportation, insurance, taxes/tariffs, and damaged and obsolete goods, etc. Additionally, there’s the cost of decreased flexibility and responsiveness due to long lead times, which has a direct effect on customer satisfaction and revenue-growth potential. The same companies that made knee-jerk decisions to offshore are finding it much more costly than first assumed when they apply such total-cost-of-ownership principles.
Secondly, the labor-cost gap is closing. According to a report released this May by Boston Consulting Group (BCG), Chinese labor costs are rising, as is the value of the yuan. Meanwhile, more flexible work rules and government incentives are making many U.S. states more competitive with low-cost countries.
For example, according to the BCG report, NCR Corp. announced in late 2009 that it was bringing back production of its ATMs to Columbus, Ga., in order to decrease time-to-market, increase internal collaboration, and lower operating costs. And toy manufacturer Wham-O Inc. last year returned 50 percent of its Frisbee production and all of its Hula Hoop production from China and Mexico to the United States.
“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the U.S.A.’ in the next five years.”
According to the BCG report, after adjustments are made to account for U.S. workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S. — even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.
By: Jason Tuma, CPA
