San Deigo reshoring

San Diego Region Prepares for Increased 'Reshoring' Opportunities

San Diego is poised to see return of manufacturing as overseas costs increase Area manufacturers specialize in prototype development, low-volume production and just-in-time delivery Government regulations, taxes, environmental issues, utility costs and availability challenge manufacturers Many manufacturers unaware of assistance programs available to them  

On June 25, 2012, the South County Economic Development Council released the “San Diego Regional Manufacturing Sector Report,” funded by a grant from the San Diego Workforce Partnership. The purpose of the report was to identify challenges and opportunities for local manufacturers in order to provide the necessary resources as a region and recommend actions “to capture previously lost manufacturing opportunities that had gone overseas.”

Manufacturing is returning to the United States because “overseas production has become increasingly more costly due to high transportation costs, expensive reverse logistics to correct product defects, and increasing labor costs.” The report states “San Diego County is poised to reap the benefits of the return of manufacturing to America. Just-in-time, product oversight, and cost efficiencies are bringing manufacturers back to the U.S. There is a unique advantage for manufacturers with San Diego’s prime location along the international border and on the Pacific Rim. This allows for easy shipping of products and co-producing products with Mexico.”

Survey Shows Fragile Recovery

To prepare for the influx of manufacturing opportunities, South County Economic Development Council (SCEDC) and its partners surveyed 283 manufacturers between October 2011 and June 2012 about conducting business in the San Diego region. The survey included questions on business history, growth projections, employment level, business challenges, labor climate, business location, markets, products and capabilities. The report summarizes and analyzes data gathered from those interviews.

The United States. as a whole lost 5.7 million manufacturing jobs from 2000 - 2010, and the San Diego region went from 128,738 down to 90,205 in the same period for a loss of 33,533 jobs...  California lost over half a million in the same period. Job creation and new hires during this period slowed considerably resulting in a seriously slowing manufacturing industry in San Diego County. The results of the survey for level of employment were mixed -- 36% had fewer employees than in 2002 and 32% had more employees. However, 50% indicated that a reduction in employees had occurred within the last 12 months showing that the recovery from the recession is fragile. On the plus side, 54% have hired in the past year, 26% are currently hiring and 36% plan to hire in the next 12 months.

The survey reveals that a large percentage of San Diego’s manufacturers specialize in prototype development, low-volume production and just-in-time delivery. “Moreover, many of the products that are made in the San Diego region offer the customer better oversight and more opportunities for collaborative approaches to product development. This makes “near shoring” a viable option (as opposed to ‘off shoring.’)” More than one-third of the manufacturers surveyed stated that customers have brought product manufacturing back from Asia.

The vast majority of manufacturers indicated they were pleased with their current location. Of the 283 companies surveyed, 238 business owners indicated they are pleased with their location. They cited a historical presence, family ties, customers and suppliers located nearby and quality of life as the reasons they liked their location. When asked about their location challenges, the top four were:

  • Government regulations -- Manufacturers felt they were overburdened by regulations: overlapping and complex regulations, employment laws, including cost of workers’ compensation insurance, burdensome hiring laws, numerous regulations governing employees, stringent compliance requirements, and the multiplicity of agencies were cited as putting them at a disadvantage.
  • Taxes -- compared unfavorably with taxes in other states, with adjacent states having a more business “friendly” tax structure.
  • Environmental issues -- “environmental regulations “getting stricter.” They also noted “the State of California had more stringent guidelines than the federal government and most other states. This puts companies at a competitive disadvantage.”
  • Utility cost and availability -- “especially concerned about electricity costs, noting that manufacturers use a large amount of energy to produce a product.”

In an effort to determine the commitment manufacturers have made to their existing locations, companies were asked if they owned or leased the facility. When a company owns a building, they have made a long-term commitment to that location, and it is not easy for them to relocate. When a company leases a site, it is easier for them to relocate. Companies that have month to month leases or rent are at the greatest risk of relocation. Ninety-eight companies (35%) indicated they owned their existing site, and 120 companies or 42% had long-term leases.

However, there is cause for concern because “many manufacturers indicated they were located in the San Diego region because their suppliers or customers were located here… 55% of the manufacturers indicated their customers and/or suppliers have relocated within the past three years.”

Finding Resources

Manufacturing companies are being courted by other states to relocate with attractive incentives to do so. The survey revealed that “Almost 75% of the manufacturers surveyed were unaware of various assistance programs available to them… 76% of the respondents indicated they had not worked with college or job training programs…Only 16% of those surveyed said they had forged a business relationship with local educational institutions…Nine percent of the businesses indicated they had participated in a state job training program.”

Several manufacturers said there was a shortage of qualified CNC machinists and they had to recruit from all over the region. The need for classes at both the high school and college level was cited as a necessity to grow these types of workers. More efforts toward preparing the future manufacturing workforce are required. Manufacturers expressed difficulty in finding qualified employees, noting many of the training programs have been downsized or no longer exist due to budget cuts. There is a need to retrain current employees and offer additional training classes related to computerized manufacturing equipment.

Additionally, manufacturers were not aware of finance, tax credit and permit assistance programs being offered. Only 20% were aware of small business finance and business assistance programs, and less than 20% were aware of various tax credit programs, permit assistance and employment assistance programs.

To ensure San Diego can maximize the opportunities provided by manufacturing returning to the U.S., the report found that “there is a need to link the innovation companies with local manufacturing…to capture the “lab to shelf” full chain of product within our region. To accomplish this, there needs to be a better connection between the innovation companies and the manufacturers. There also needs to be a better way to link local manufacturers with each other as well as link companies to local suppliers.”

An efficient way of connecting companies is through the Connectory.com database, which is an online resource containing detailed capabilities and profiles of manufacturers and supply chain companies. San Diego County currently has over 5,000 company profiles on Connectory.com. Profiles make it easier to understand the capabilities of the manufacturing supply chain and find core capabilities and capacities that are needed for the large amount of contracts and subcontracts available in San Diego County.

Michele Nash-Hoff is president of ElectroFab Sales. She is the author of "Can American Manufacturing Be Saved?"

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