After years of chasing the lowest cost labor, materials and overhead costs overseas, companies are now recognizing previously unforeseen risks and costs and changing their perspective on what constitutes efficient and wise production practices. Now, the tide seems to be turning in favor of the U.S., where production is more frequently reshored, for goods sold both domestically and to export markets.
Manufacturers should expect this trend to pick up steam through the coming years, according to a recent Boston Consulting Group survey conducted in late February 2012 regarding attitudes around reshoring. Among 106 large U.S. manufacturers surveyed, 70% said sourcing in China is more costly than it looks on paper, and 37% said they plan on bringing production back to the U.S. from China, or are actively considering it.
The case for reshoring is compelling; it helps manufacturers eliminate substandard quality goods produced offshore, avoid theft of IP, cope with supply chain issues and improve their overall competitiveness. With companies realizing the benefits and economics turning in favor of the U.S., and previously lost skilled jobs returning after being lost for decades, what are the other risk factors associated with offshoring that can tip the balance towards reshoring?
It's no secret that the economies of the developing world are growing at a higher rate than the rest of the world. The accompanying wage pressure, due in part to increased demand for skilled labor, is driving wages up as well -- climbing approximately 15% to 20% annually in China. Soon, the time will come when labor cost are nearly equal, erasing one of the most significant advantages to offshore production.
Companies will also soon see rising rates for engineering and manufacturing draw closer to that of the U.S. According to consultant AlixPartners, manufacturing costs for China will no longer seem like a bargain by 2015, factoring in currency and shipping costs, when they will be equal to the U.S.; India and Mexico are close behind, but the trend is clear.
Recent and ongoing coverage of the conditions in overseas manufacturing facilities casts a spotlight on an easily ignored aspect of the offshore equation: in-country labor management is left to contend with workers, yet the impact of strikes, dissatisfaction, and calls for better pay and conditions can reverberate well beyond their shores.
Time spent bringing offshore facilities up to acceptable standards, where safety and general working conditions are frequently deplorable, means production suffers in the short term. Potential exposure for supporting or partnering with these companies can be a concern, especially if a domestic manufacturer does not have full access to its offshore partner. Additionally, a manufacturer runs the risk that its reputation, operations and public perception may suffer due to circumstances and events beyond its control.