Onshoring grows popularity in the U.S.
Onshoring has lately become a trend in the U.S., with mounting operating costs being a major consideration. Frank Cavallaro enumerates several more factors that makes doing business at home more profitable for the American manufacturers.
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 per cent of overall US procurement. This is the first article in a six-part series that will focus on ten compelling reasons fuelling 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. Labour costs
Once the number one reason for American companies to outsource, the cost of labour 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 per cent 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 per cent since 2005.
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.
Revelations of child labour 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, labour 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?
- Frank Cavallaro
CEO & Founder Fronetics Strategic Advisors