The trend of offshoring manufacturing to countries with strong labor forces, low wage rates, and favorable business climates is a very familiar concept to the industry. While the quest to find the right manufacturing environment will never go away, North America is now once again being considered for such operations – a trend known as onshoring. Onshoring quickly gained speed over the past two years, which leads the question of what triggers companies to actually consider migrating back to the U.S. in the first place? Simple: cost, capital, and the job market.
Companies have begun to realize that shifting manufacturing operations overseas might not be as advantageous as it was just a few years ago. Wage rates that were once substantially lower in India and China have increased 15 to 20 percent per year as these economies have experienced tremendous growth.
When all of the supply chain-related costs such as transportation, risk, real estate, and duties/taxes are considered, manufacturing in China rather than North America is becoming less advantageous every year. As fuel prices continue to increase, the cost of shipping something halfway around the world will continue to rise. These factors, coupled with excessively long lead times and decreased flexibility, put substantial constraints on the supply chain. Many companies are deciding the risk is just not worth the shrinking monetary gains in manufacturing cost.
According to a 2011 Boston Consulting Group study (“Made in America, Again”), 2015 will be a watershed year for the cost of production. For the first time, it will essentially cost the same or greater to produce goods in China and supply North America than it does to make the goods in North America to serve the local market. The study cites several examples of companies that have already onshored manufacturing such as the Coleman Company, which moved a cooler plant from China to Kansas, and Peerless Industries, which consolidated facilities from China to Illinois.
Another factor, sometimes overlooked, is that China is still a communist country. A leading design that is exported out of the U.S. for manufacturing and development in China or elsewhere in Asia is often copied and distributed to state-run organizations. Google and Microsoft have both threatened to leave the country because of cyber attacks, an interesting position considering the size of the Chinese market they would be leaving behind.
Demand in a foreign market may also cause manufacturing jobs to head back to America. As the Chinese economy continues to grow and more individuals have access to discretionary funds to spend, demand for the same high-level goods that are consumed in the U.S. will emerge in China. If a company can make product in China and sell it in China, why worry about shipping it back to North America? To keep up with future growth, it is logical to produce products in the same market in which they are consumed.
While we are in the very early stages of reallocation in global manufacturing, employment will soon begin to flow back to North America in greater numbers. These recalled jobs will need manufacturing space. As offshored employment begins to flow back to the U.S. on a large scale, which some experts believe will happen, rents will start to skyrocket. Based on these facts, consider onshoring in your network decision-making process before you’re left behind.