The discussion over shifting manufacturing activities (specifically for electronics) from foreign countries to the United States has been going on for a couple of years. The notion of a large-scale relocation of manufacturing capacity is overblown, but several recent examples make it worthwhile to examine whether electronics manufacturers ought to reshore their manufacturing.
Motorola has announced that its latest smartphone will be manufactured in Fort Worth, Texas. It says the Moto X will be the first such device to be assembled in the US. Apple has confirmed that it will move some of its Mac production to Texas. And there are reports that Google Glass will be produced in America.
In a 2012 IPC survey (subscription required), 11 percent of electronics manufacturers in North America said they had brought operations back since 2009, and 20 percent said they had created operations there.
The case for moving manufacturing activities to the US (a process variously known as reshoring, onshoring, and nearshoring) was laid out in a 2011 Boston Consulting Group paper (registration required). The idea goes like this: Manufacturing costs are rising in Asia (particularly China) but leveling off in the US to the point where it may be just as advantageous, if not more so, to manufacture goods for North American consumption in the United States.
Industrial wages are a large part of the equation. In China, they are increasing 15-20 percent a year, but Chinese labor productivity is rising only 8 percent a year — not enough to match compensation gains. Meanwhile, the costs and risks associated with relying on extended supply chains are increasing. “Transpacific shipping rates are going up,” the BCG report said. “While ocean freight remains inexpensive, the doubling of bunker-fuel prices since early 2009 is causing rates to increase.”
In a July 5 radio interview, Harry Moser, president of the Reshoring Initiative, discussed the process of determining whether reshoring will improve profits and efficiency. “Instead of just looking at wages and per-piece prices, companies need to look at the total cost. That includes duties, freight costs, packaging, and factors like opportunity lost due to long lead times.”
Other costs that need to be considered include inventory carrying costs, intellectual property risks, and the costs associated with high levels of corruption in some presumably low-cost countries, he said. In all, 29 elements of cost need to be considered. “When you look at all these other costs, you see that offshore costs are not 30 percent lower but maybe five to 10 percent lower. When you apply techniques like better training, lean manufacturing, and automation, you can knock out that differential.”
Moser said as much as 25 percent of manufacturing capacity located elsewhere could be moved to the US. Others are skeptical of that claim.
As a Federal Reserve Bank of Chicago blog post suggested, a mass repatriation of manufacturing assets to the US would show up in an improvement in the US balance of payments, and we are not close to reaching that point yet.
“Shifting patterns of global trade and technological change make for a murky geographic landscape,” the article said. “But at the very least, some of the shifts underway will be toward U.S. domiciles rather than away from them.”
Where do you stand in the onshoring debate? Let's keep the conversation going in the comment section.