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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.

19 comments on “Cost Analysis: Reshoring Is Viable

  1. Nemos
    May 30, 2012

    “A recent report on manufacturing site selection contains both good news and bad news for the US.” As an optimistic person I will focus at the good news. Although it makes me to think because of the small different in manufacturing costs maybe companies stop to migrating to other countries (the manufacturing sector) from the other hand, I am wondering it that 20% is because the American workers earning so little…

  2. Anna Young
    May 30, 2012

    Barbara, I'm not at all surprised at this report findings by Hackett groups. “The cost increases in China are impossible for companies to ignore,”  Okay, we understand. So these jobs will not make it's way to the developed economy. I think the Western countries realised this long ago that the manufacturing industry will not make its back.  I'm wondering what happens in some years to come, say after China, Brazil, India etc. What's next?

  3. _hm
    May 30, 2012

    It is also due to prudent compromise from US labour force. They need to control their expectation. You do not expect to pay $100+ for auto assmebly line worker with moderate efficiency or also true for other fields. Unions are also part of problem. If better sense prevail, much of reshoring will take place soon and this will be very good for all.

     

  4. Taimoor Zubar
    May 31, 2012

    @_hm: I think the wage rate in a particular country or region is determined by the supply of labor force and their expectations. One of the key reasons why the US workers expect a high wage rate is because the cost of living in the US is high. So the .workers need a higher wage to bear that.

  5. Taimoor Zubar
    May 31, 2012

    I'm wondering what happens in some years to come, say after China, Brazil, India etc. What's next?”

    @Anna: I think manufacturers will continuously look for lower cost options and regions with low labor costs. I believe the countries next in line could be Pakistan, Bangladesh, Vietnam or Kenya.

  6. Barbara Jorgensen
    May 31, 2012

    @Anna: I wasn't surprised by the findings either, but I continue to be surprised that a good slice of the American public still believes that reshoring manufacturing is going to be the savior of the US economy. Aside from all the political posturing, I believe the US workforce has priced itself out of most low-skilled manufacturing jobs.

  7. ahdand
    May 31, 2012

    You can also consider Sri Lanka as well. The labou cost here is very low and you have alot of resources and man power to back your business. Thee is a huge job market here in Sri Lanka where foriegn investors can benefiot a lot out of it if they consider the island

  8. Anna Young
    May 31, 2012

    @TaimoorZ, You're absolutely right. The decision about where a product is produce is always driven by multiple factors, of which labour cost is one.

  9. chipmonk
    May 31, 2012

    I am putting my money on Vietnam. They have the right location ( Pacific ), scale ( not too big to entertain superpower dreams ), attitude, intelligence & persistence ( after all the pounding they took from the US for 12 years, they still won ). Intel is already there and loving it.

  10. Barbara Jorgensen
    May 31, 2012

    Chipmonk–I can actually see people in the US supporting outsourcing to Vietnam. Regardless of the reasoning at the time, the US inflicted a lot of damage on that nation during the war. Seeing businesses (rather than government) adding to its economic growth would be heartening.

  11. Anna Young
    May 31, 2012

     I believe the US workforce has priced itself out of most low-skilled manufacturing jobs.”

    I believe so too Barbara. And I think that low-skilled workers can benefit from the changes in the demand for skills if they receive additional training.

  12. Anna Young
    May 31, 2012

    Chipmonk, that'll be great. It'll certainly benefit the country economically.

  13. Wale Bakare
    May 31, 2012

    You are right. In addition to that, after the BRICS —-  according to Goldman Sachs Asset Management department, the next emerging group of countries called next 11 (N-11)  – Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam

  14. Barry
    May 31, 2012

    Unfortunately the analysis leaves out an important fact. It becomes highly more unlikely you will pull out of China or SE Asia and return to the U.S. if you are selling to those countries. And for the first time, the combined GDP of BRIC countries has exceeded those of developed countries. So where does the future lie in terms of increasing sales and being close to your market?

    Also, I don't see employment being such a large beneficiary of any increased manufacturing done in the U.S.- at least not as much as it used to be. There's too much automation now. Instead, support industries to manufacturing, i.e. engineering, specialized training, knowledge-base industries, are the ones that will be more directly affected. The key, therefore is manufacturing the items that will enhance our technological edge- not the low-laying fruit which carries little overall advantage for us.

  15. _hm
    May 31, 2012

    I do not agree. When people unfortunately lost jobs, they had reality check and now are ready to work at much lower rate. This is true for everyone – unskilled labour to highly intellectual engineer or scientist.

     

     

     

  16. FLYINGSCOT
    June 1, 2012

    I wonder if Western countries will ever accept paying 20% more for goods for the greater good of their local communities and jobs.  I understand why companies keep chasing low cost manf locations but is it truly the long term solution?

  17. Barbara Jorgensen
    June 1, 2012

    @Barry–thanks for pointing that out. The report does mention the BRIC nations and says the following:

    “Between 1990 and 2010, the nominal value of global exports of manufactured goods more than quadrupled. When adjusted for inflation, this equates to a nearly tripling of value and a CAGR of 5.5%. To put this into perspective, during the same period, the combined GDP of North America, Europe, Japan and the BRIC countries grew at a CAGR of 3.0%, resulting in real GDP gorwth of 80%. China has been the biggest beneficiary of these developments. Between 1990 and 2010, its shre in global manufacturing exports grew from 1.8% to 14.4%.”

    I don't think pulling out of BRIC is going to happen large-scale: many manufacturers want to sell into those markets as well as export from them. I think the report indicates that there will be some rationalization of what makes sense to manufacture closer to home markets.

    On your last point, I agree: manufacturing is so automated that you won't have a big surge in jobs. However, the perception in the US is that if manufacturing returns, so will job growth.

  18. Barbara Jorgensen
    June 4, 2012

    @hm: I tend to agree with you. There is another side of the equation, which is covered really well in Time magazine: http://business.time.com/2012/06/04/the-skills-gap-myth-why-companies-cant-find-good-people/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+time%2Fbusiness+%28TIME%3A+Top+Business+Stories%29 Becuase of supply and demand, it seems that employers can afford to wait until the perfect candidate comes along.

  19. _hm
    June 6, 2012

    @Barbara: Labour force has very well understood situation and behaved in debonair way. Now it is turn for middle and higher management to compromise. With this US will become very competative and many more job will come back to US.

     

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