How to Determine Whether Reshoring Is Right for Your Business

Helping with companies’ reshoring efforts is the Reshoring Initiative, whose mission is to bring good, well-paying manufacturing jobs back to the United States. We caught up with Founder and President Harry C. Moser, who spoke at the Mississippi conference, about the current and future state of reshoring.

MCEOB: How can a manufacturer benefit from reshoring?
HM: For OEMs—bigger companies with branded products—many of them offshored years ago without doing a comparison of total cost of ownership (TCO) for domestic vs. offshore. Also, times have changed. Chinese wages are going up 15% to 18% a year, and it’s time to re-evaluate the math. If they did, many would conclude that reshoring would be more profitable, they would have a better quality product, and a better company image if they reshored.

“Reshoring could potentially be more profitable, provide a better quality product, and improve the company image.”

For suppliers of small and midmarket companies, we recommend that they reshore when their customers reshore. For example, if a large company brings back the assembly of a large piece of machinery or equipment, that would provide an opportunity for them to start purchasing many more of the components in the U.S. than when they were assembling in China. So suppliers benefit from that action.

MCEOB: What are the top three things manufacturing CEOs need to consider when evaluating reshoring?
HM: First, look at products where they have pain points—issues of quality, delivery, intellectual property, high travel expenses, midnight phone calls, etc.—and identify the components and sources associated with them. Next, evaluate the total cost of ownership (TCO) for these products. It’s not just the price, but the duty, freight, packaging, travel, intellectual property risk, etc. Evaluate the TCO for those parts and components where you are having the most issues and are now motivated to do something.

Finally, see if others in your industry or region are reshoring. If so, talk with those CEOs to gain more insight into the process and to see what factors to consider, such as rising wages in China, the impact on innovation when you separate engineering from manufacturing—all the quality considerations. These are all typically not as good from lower-wage countries.

MCEOB: What can a manufacturer expect their reshoring initiative to cost?
HM: It depends on what they will be reshoring. There are three components to consider:

First, a company should stop sending work offshore without doing the math. If the analysis shows that it’s more profitable to start up new work here, then keep your existing work offshore but start new projects here.

Second, they should bring back the lowest investment work first. In other words, if someone is machining a part for them offshore and now they’re going to have it machined stateside, the cost to switch will be almost nothing. There should be no tooling, minimum travel, etc. They don’t have to buy any machines.

“Companies should consider bringing back the lowest-investment work first.”

At the other extreme, if they have built their own factory offshore and spent $10 million or $20 million and they think they’re going to shut it down or sell it and build a new one here, there is a lot involved with construction, employee hiring and training, etc. It’s critical that they do a detailed analysis of what it’s going to cost to make sure the savings they get from reshoring will be sufficient to pay back the cost of the transition. The ideal situation would be, if your offshore factory is producing 50% for the U.S. and 50% for Asia, then put your incremental investment into gradually making the transition for the 50% that ships to the U.S. At the end of 4-5 years, your entire U.S. market supply will be stateside and your offshore facility will produce products entirely for Asia.

MCEOB: Can manufacturers expect any help from the federal or state governments?
HM: At the federal level, there is no money involved, but the Commerce Department provides a lot of helpful information. They have a nice website called acetool.commerce.gov (ACE stands for “Assess Costs Everywhere”). Also, MEPs, manufacturing extension partnerships associated with the Commerce Department, can help with the analysis.

Several states’ programs are under way to bring our methodology to companies to help them do analysis and make decisions. At the state level, there are incentives for both reshoring and foreign direct investment, such as the Japanese automotive companies building plants here. The money—for things like tax rebates, training and highway connections if you’re big enough—can be pretty substantial. The state incentives typically do not drive your decision to go offshore or reshore, but rather, it’s about choosing between one state and another. So states are bidding for companies’ business—just look at Tesla’s Nevada deal. You might retain a site selection consultant to help you maximize the benefits.

MCEOB: How long would it typically take for a manufacturer to recoup its costs and generate a return on reshoring?
HM: There is no consistent formula. It depends on the nature of the project. For instance, Hubbardton Forge, which makes high-end lighting systems, offshores aluminum die castings. They tried bringing back the dies and tools, and the tools were so rough that the U.S. companies said we can’t use these. So they decided, we’re going to leave in China what’s in China, and when we come out with new components and parts, we’ll look at the possibility of staying in the U.S. So instead of bringing things back, they’re just applying the methodology to the new things. Over 3-5 years, the old parts will phase out and then they will have everything in the U.S. without having to go through a transition.

MCEOB: Will 3D help facilitate reshoring?
HM: It’s not clear in the near-term. Additive manufacturing is hot, but mainly for prototypes and shapes you can’t make otherwise. It generally doesn’t apply to real production except in rare cases. It’s not clear whether you can get the accuracy and surface finish, or whether the cost is competitive for most products. The costs have to come down, cycle times have to improve and accuracy and surface finish have to improve to have a significant impact. Great progress has been made, but we need more.

“Get everyone, from guidance counselors to students to parents to refer to these jobs as professions.”

MCEOB: Finding the right employees for manufacturing positions is a challenge right now. What advice would you give to a manufacturer bringing jobs to the U.S. who may be looking for a specific type of experience?
HM: Start by running an apprentice program, with the theoretical training done at the local community college. Then get on the advisory board of your community college’s technology/ manufacturing program to help make sure the courses are relevant to you. Third, hire the best students. Finally, get everyone—the college and your company included—to refer to these jobs as professions. Show the financial benefit and improve the image and desirability. Get all companies in your community with successful reshoring projects to report their case studies to the local media and schools so everyone—from guidance counselors to students to parents—sees manufacturing as a good field to go into.

MCEOB: Can you cite an example of a company that has successfully reshored?
HM: The single best example is GE Appliance. They were having three appliance models made in China. They brought samples back to their huge Appliance Park facility in Louisville, Ky., invested about $1 billion and created 1,300 jobs. They put the samples in the war room. The designers and engineers tore them apart and put them back together. When they were done, the thermal efficiency was improved, warranty costs were cut, and even though wages in the U.S. were five times higher than in China, the U.S.-made product sells for 20% less today than the product they had been importing from China.

MCEOB: What are the total-cost-of-ownership factors that manufacturers typically need help with when considering reshoring and how do you respond to those questions?
HM: They want to know how to measure the intellectual property risk and the political instability risk in the other country. I can’t answer those questions. That’s where this acetool website can help. It has data on a lot of those qualitative factors. We can show the distribution of inputs by other users.

MCEOB: Where do you see manufacturing reshoring in five years, and what has to happen stateside to keep reshoring moving forward?
HM: We typically add together both reshoring and foreign direct investment when we look at projections. Recently, foreign direct investments have been booming. Right now, we’re at about 40,000 net of offshoring coming in annually, and I see that getting to 80,000 a year, maybe 100,000, in five years. That’s only about 1% of our total manufacturing employment, but that’s about as much growth as our skilled workforce can handle right now. We don’t want it to grow any faster than that because we need the training to grow with the market.

The mission of the Reshoring Initiative is to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from ‘offshoring is cheaper’ to ‘local reduces the total cost of ownership’. Find out more about the Reshoring Initiative at http://www.reshorenow.org.

Additional Resources
Case Studies: Reshoring Initiative
Case Studies: U.S. Dept. of Commerce
Total Cost of Ownership Estimator
U.S. Department of Commerce Assess Costs Everywhere

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