Cost Analysis: Reshoring Is Viable

A recent report on manufacturing site selection contains both good news and bad news for the US.

First, the good news. According to the report, "Reshoring Global Manufacturing: Myths and Realities," by the Hackett Group, the cost gap between manufacturing in China and production in the US is narrowing. By 2013, says the report, the total landed cost of manufacturing in China will be only 16 percent lower than that of the US. This margin, analysts believe, represents the "tipping point" where manufacturers consider reshoring as a viable option.

Now, the bad news. The study also finds that companies are pursuing sites in other developing nations as a low-cost alternative to China. China has been a handy scapegoat in the debate about US jobs moving offshore. According to the Hackett Group, jobs will still remain offshore -- just not in China:

Countries including India, Thailand, Vietnam, and Brazil continue to successfully grow their share of global manufacturing as they become more cost effective countries for manufacturing. "The cost increases in China are impossible for companies to ignore," said The Hackett Group Chief Research Officer Michel Janssen. "As Chinese wage rates rise, companies are looking to maintain their competitive edge by either bringing that production closer to developed markets, moving it to lower wage countries, or increasing productivity in China."

From my perspective, the question now becomes: Will these nations become as vilified as China? They are, after all, landing jobs that 20 years ago would have existed in the US. I think it depends on whether the US accepts the fact that these jobs are never coming back: "Few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries," the report concludes.

There are other factors that have contributed toward the vilification of China: the theft of IP, human rights abuses, unfair trading practices, and low-quality merchandise among them. But from a purely practical perspective, costs in the US and China aren't that different:

Reshoring is expected to become more viable with each passing year, as the total landed cost gap of manufacturing offshore shrinks. The Hackett Group’s research found that the cost gap between the U.S. and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent by 2013. This trend is largely driven by rising labor costs in China, as well as rising fuel prices globally, which affects shipping costs.

Total landed manufacturing cost continues to be the leading factor in companies' site selection. The key components of this cost are raw material and component costs; manufacturing costs; transportation and logistics; inventory carrying costs; and taxes and duties. According to the Hackett Group, the cost differential between other developing nations and the US is as much as 20 percent. As long as the majority of manufacturers -- 85 percent, according to the study -- measure cost as the main driver in site selection, manufacturing is likely to remain offshore.