The trend of companies that once placed manufacturing operations offshore only to move all or a portion of the production capacity back to the U.S. started gaining traction a couple of years after the Great Recession (which ended in mid-2009). During the last seven years, there has been a continuous uptick in reshoring, mostly in manufacturing although there have been some customer service operations that have relocated back to the U.S. as well.
I have been in the corporate site selection business for almost four decades. Reshoring is one of the most revealing and meaningful dynamics I have observed. For the first three decades of my career, there was a tide of manufacturing leaving the U.S. for low-cost production sites in Asia, Mexico, Central America and to a lesser extent, Eastern/Central Europe. Nearly all industries engaged in this strategy. The predominant driver was labor cost reduction. Even some “heavy” industries such as petrochemicals and aluminum smelting established new capacity offshore, in part due to lower energy costs.
What has changed and fueled the movement back to the U.S.? First and foremost is the investment in technology (e.g., artificial intelligence, robotics, process efficiency, etc.). Manufacturers across the industry spectrum have dramatically reduced the labor content as a proportion of cost of goods sold. In addition, wages have been dramatically rising in China where the bulk of offshore operations migrated. Consequently, the “wage delta” has become less significant than at any time in recent history. As a result, wage cost arbitrage has diminished in importance for many industrial enterprises.
It is true that in the last two years wages have risen faster in the U.S. than China. However, long term the equation will continue to favor the U.S. in part as China continues to move up the food chain in manufacturing, requiring greater skills that will demand higher wages.
There are also a host of other reasons underpinning the reshoring phenomenon. These embrace: (a) cost/risk associated with long/extended supply chains, (b) lower U.S. energy costs, (c) long lead times for changing orders, (d) intellectual property protection, (e) management time to oversee offshore operations, (f) a stable and growing market in the U.S. and (g) consumer preference for purchasing made-in-America products.
I have read company announcements and media stories for myriad reshoring examples. One common thread somewhat surprised me. A noticeable percentage of reshored operations moved back to the original site (or least community) in the U.S. In retrospect, there is solid logic for following this pathway. Facility footprint, embedded infrastructure and management proximity can be compelling reasons to relocate to the origin site. Thus, it appears that the economic and business drivers clinch the deal for reshoring. This leads to less emphasis being placed on where to reshore with whether or not to reshore shaping the decision by a far greater degree.
While companies still opt to reshore and then engage in a classic site selection process, a noticeable percentage of companies have reshored to American-based operations of contract manufacturers (outsourcing). Here again the decision was more whether than where.
One challenge some companies face when reshoring is the paucity of qualified suppliers. Some industries almost vanished from the American manufacturing landscape (i.e., television production), taking with them their American-based suppliers. Therefore, when reshoring, some companies will need to rely on foreign suppliers until the U.S. vendor base reconstitutes.
I believe a tad more due diligence on the where component of the equation deserves greater attention. The original home location might indeed be viable. But as key variables (e.g., skilled labor availability) can markedly differ across geographies, it seems worthwhile to evaluate additional geographic alternatives before making a final decision.
In conclusion, I foresee reshoring accelerating as a trend. The fundamentals are in place to continue strengthening America as a global powerhouse in manufacturing. We must hope our federal and state policymakers continue to support the competitiveness of our country, states and communities. T&ID