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10 Compelling Factors Driving Onshoring

It's the trend that seemed unthinkable only a decade or so ago: American companies bringing business back from abroad.

Although onshoring so far has resulted in a trickle rather than a tidal wave of new jobs, the fact it is happening at all has generated hopes of a manufacturing renaissance in the United States.

Over the next 12 months, as many as one third of American businesses say they are likely or very likely to move goods and services back from overseas, potentially leading to the recapture of five percent of overall US procurement. This is the first article in a six-part series that will focus on ten compelling reasons fueling this onshoring trend. Also known as reshoring, homeshoring, backshoring, insourcing, and repatriating manufacturing, the phenomenon will, for the purpose of these articles, be referred to as onshoring.

A number of factors, none of which alone would not prompt a company to terminate an overseas venture, have coalesced to make the value proposition of electronics “Made in the USA” increasingly hard to resist.

1. Financial motivators
Soaring wages in low-cost countries in combination with rising shipping rates and land prices are chipping away at China's cost advantages. At the same time, industrial wages in America have been stagnant while the extraction of natural gas has caused a dramatic drop in domestic energy prices.

2. Labor costs
Once the number one reason for American companies to outsource, the cost of labor is rising so sharply in Asia that pay for senior management executives is on par with, or exceeds, that of their American counterparts. Chinese factory workers saw their wages increase by an average of 19 percent between 2005 and 2010, according to one Boston Consulting Group report. In contrast, manufacturing wages in the United States have in the face of the economic crisis declined 2.2 percent since 2005.

3. Automation
With industrial wages in China, despite the recent increases, still being well below those in the United States, automation is considered key to leveling the playing field. Sophisticated equipment, such as robotics and automated guided vehicles (AGVs), also require a more skilled workforce, which is in greater supply in America.

4. Intellectual property protection
The protection of intellectual property is haphazard at best in China and other low-cost manufacturing nations, leaving some companies to conclude the best protection is not investing overseas at all.

5. Transparency
Revelations of child labor and environmental destruction in China has resulted in negative publicity for some companies and calls for improved transparency of the supply chain. Some found closing up shop overseas and moving closer to headquarters to be the best solution to achieve better oversight.

6. Risk management
In the heyday of offshoring, the risks were not always fully considered. The fluctuating price of oil, labor disputes, freight costs, safety issues — to name a few — have added a layer of costs and bureaucracy that some companies concluded they could do without.

7. Closer to customers
A desire to move closer to the customers plays a key role in the decision to onshore, according to several surveys. Proximity also creates a better environment for innovation, keeping manufacturers and designers together.

8. Quality control
Offshoring often means giving up some aspects of control and as many companies have discovered, quality may suffer as a result. In a survey of 229 billion-dollar-plus companies, quality control was cited as a primary reason for bringing operations back to North America.

9. Ease of doing business
Language barriers and different business cultures aside, keeping the suppliers close makes financial sense as transit times are reduced and quality issues can be addressed more quickly. As one executive put it, product cycles are “too fast for a 12,000-mile contract.”

10. Reduce supply chain disruptions
Civil unrest, port closures, and natural disasters add uncertainty and unanticipated costs to doing business overseas.

What do you consider the driving force behind onshoring to be?

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11 comments on “10 Compelling Factors Driving Onshoring

  1. Finance guy
    April 1, 2014

    You should also consider the issue of counterfeit parts comming from China. Its a huge issue, easily a top 10 problem.

     

    Also political instability, but that could be wrapped up in #10.

  2. Hailey Lynne McKeefry
    April 2, 2014

    @Finance Guy, you are right…. Counterfeiting is a huge conversation. So much so that we focused on it in our recent Velocity e-Mag which can be found here. It's a huge issue of sourcing, especially when a verifiable source can't be found.

  3. Hailey Lynne McKeefry
    April 2, 2014

    Readers, Finance Guy makes a great point. is there anything that you would add to the list? Which points would make your top three list?

  4. Eldredge
    April 3, 2014

    @Hailey – I would put 4, 6, and 8 (Intellectual Property Protection, Risk Management, and Quality Control) as my top three compelling reasons, although it may be more difficult to put an accurate dollar amount on these compared to labor and shipping/handling/distribution costs.

  5. Eldredge
    April 3, 2014

    While America may have the ability to address productivity through automation, I have often thought that off-shore production could also pursue that avenue, while simultaneously maintaining at least some labor cost advantage. That strategy may take some time to evolve (build skill base and capital investment), but it has the potential to tip the scales back toward off-shore manufacturing.

  6. Finance guy
    April 5, 2014

    I agree, but higher end boards will keep pushing the limits, and NA is better equiped to maximize the labor/capital benefits in production. 

    The bottom line is a move towards capital intensive production works for the USA, particularly for products that will be sold in the USA.

    I also beleive the the long held undervalued Chinese currency (although improving) may be creating problems which are just starting to wreck havoc in China. Remember this is a Communist country that really does not understand free market dynamics. 10-12% historic GDP growth, and where's the inflation???

     When left alone the market works very well, if the particpants behave. That can not be said of China for many reasons. Stay tuned, this should be interesting!       

  7. Eldredge
    April 6, 2014

    @Finance guy – You are probably right, and currently another aspect in favor of NA is that China probably doesn't perceive a need to pursue full scale automation. Also, as you pointed out, there are, and will continue to be, other forces in the marketplace that may work to level the playing field. Access to energy supply, and impacts of water and air pollution on the health and attitudes of the population come to mind, as well as economic pressures of a society that desires to improve their standard of living. It will be intersting.

  8. Hailey Lynne McKeefry
    April 9, 2014

    The finance issues you mentioned are very interesting, Finance Guy. it's something that we don't focus on enough.

  9. Anand
    April 26, 2014

    Asian markets are seeing the rise of skilled workers and management people, too much for American based companies to handle? These same companies complained about unskilled labour that was damaging their economic models, and now these same companies cannot afford labour? 

  10. Anand
    April 26, 2014

    Transparency for a large company would indeed be disastrous. Not only would it show the companies' failures, but also it would leave the company open for attack from competing companies.

  11. Hailey Lynne McKeefry
    April 29, 2014

    I would argue that there are two kinds of transparancy: internal and external. You are really focusing on the external kind. However, different departments within the organization having visibility and insight into planning and activites of the various departmetns can be really useful.

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