Reshoring, like politics, makes strange bedfellows. Consider, for instance, the recent spectacle of retail giant Walmart gathering 500 of its biggest suppliers into one room and urging them to manufacture their products right here, in the United States. There is a delicious irony in the fact that Walmart, of all companies, is now spearheading a "Made in the USA" effort since it was largely the retailer's insistence on rock-bottom low prices that led many of its U.S. suppliers to ship their work overseas to China in the first place. Probably no other company has done more to promote Chinese-made goods to the American public than Walmart, and yet as the political winds shift, so too do the sourcing strategies of U.S. companies.
Just ask Jeff Immelt, chairman and CEO of industrial conglomerate General Electric Co. (IW 500/6). Since 2002, on Immelt's watch, GE has reduced its U.S. workforce by one-fifth (according to The New York Times), while adding tens of thousands of jobs overseas. Immelt's appointment a couple years ago to head up the Obama Administration's Jobs Council raised eyebrows not solely because of GE's proficiency at offshoring jobs, but also because the company's core competency is actually finance, not manufacturing. (GE has more than $100 billion in untaxed profits parked overseas, according to Bloomberg data.)
Nevertheless, GE has pulled off a 180-degree shift, from being the poster child for offshoring to becoming a champion of reshoring, thanks to its decision to invest close to $1 billion in its GE Appliances business. Using lean manufacturing principles, GE will, among other things, build high-end frontload washers and dryers at its Appliance Park facility in Louisville, Ky. -- the first time these types of products have been built in the U.S. But the real attention-getter is the creation of 3,000 new GE jobs in Louisville.
Not surprisingly, those new jobs have Kentucky politicians beaming with pride. "GE is a prime example of the growth that can come when we combine federal and private investments to develop new technologies, attract new product lines and create more jobs here at home," says Rep. John Yarmuth, making it clear if not necessarily obvious that government incentives (funded, of course, by taxpayer dollars) had a lot to do with convincing GE to invest in U.S. jobs rather than Asian jobs.
A Dearth of Data
What's unclear, though, is how significant an event this is beyond the borders of Kentucky. While many U.S. manufacturers have gone on record as opening new U.S.-based plants or bringing work back from foreign shores, it's difficult to measure whether these moves are symbolic or substantive. In this Big Data-obsessed world, the reason why the economic effects of both offshoring and nearshoring tend to be anecdotal rather than substantive can be easily explained in two words: no data.
For instance, Chad Moutray, chief economist of the National Association of Manufacturers (NAM), says there is no data available on how many U.S. companies are manufacturing product overseas. Similarly, there are no hard numbers to indicate whether offshoring is continuing at the same pace it has been for the past 20 years, whether it's decreasing or even whether it's increasing.
"There is absolutely no government data," adds Harry Moser, founder of the Reshoring Initiative, an industry-led effort to bring manufacturing jobs back to the U.S. (as well as a member of IndustryWeek's Manufacturing Hall of Fame). To compensate for that dearth of data, Moser has tracked all of the published articles and news reports of reshoring efforts, and produced a best-guess scenario of the current state of offshoring vs. reshoring.
In the years 2000 to 2008, Moser projects that U.S. manufacturers were offshoring jobs at the rate of 100,000 to 150,000 per year. Over the same time span, reshoring efforts accounted for roughly 2,000 jobs per year, he believes. Today, however, the situation has markedly changed, as the reshoring of jobs to the U.S. has risen to about 30,000 jobs per year, while offshoring has slowed to between 30,000 and 50,000 jobs per year. So we've almost reached a plateau where reshoring has caught up to offshoring, Moser believes.
"It took us 60 years of offshoring to get us where we are today," Moser points out, "and it could take 20 to 30 years to reverse the trend."
Still Early in the Game
In the absence of hard data, then, we'll have to make do for now with the various surveys and studies that at the very least suggest that something is going on out there. For instance, the Institute for Supply Management (ISM) recently polled close to 600 attendees at its annual event, and of that number, 30% said that they were either likely or very likely to bring some manufacturing work back to the U.S. within the next six to 12 months.
One way to interpret that number, says Tom Derry, CEO of ISM, is that "it's still early in the game. People realize that the macroeconomic conditions fundamentally have changed around the globe, and the time is right to start evaluating what to bring back. One of the factors clearly is cost, and it's not just China. There have been 20% year-over-year increases in labor costs in China, but that's also true of Malaysia, Indonesia and Vietnam. Labor costs are becoming equivalent globally, and it's going to be harder to play that labor arbitrage game."
The end result, according to Derry, will be a balance of manufacturing. "The U.S. will never be as dominant as we were after World War II -- those days are long gone -- but what you'll see is some production moving back to this country, some back to Mexico and some back to the Caribbean. Overall we're heading toward a world that's multipolar in terms of manufacturing capability. It's more balanced, with not any one dominant player."
A recent study conducted by Boston Consulting Group (BCG) points to a distinct shift in thinking as to what exactly constitutes a "low-cost country." When adjusted for productivity, U.S. labor costs could actually be as much as 15% to 35% lower than those of Western Europe and Japan by 2015. Also, BCG projects that average manufacturing costs could be 18% higher in Italy than in the U.S., 10% higher in Japan and 8% higher in the U.K. by 2015.
"Over the past 40 years, factory jobs of all kinds have migrated from high-cost to low-cost countries," notes Harold Sirkin, senior partner with BCG. "As the economies of global manufacturing change, the pendulum is finally starting to swing back. In the years ahead, it could be America's turn to be on the receiving end of production shifts, as more companies use the U.S. as a low-cost export platform."
One of the keys -- both to the reshoring effort and to a resurgence in U.S. manufacturing -- will be the low cost of U.S.-produced natural gas extracted from shale, the BCG study notes. By 2015, natural gas will be far more expensive elsewhere: 16% higher in China, 28% higher in France and 29% higher in Germany.
A recent report from the American Chemistry Council (ACC) examines 97 chemical and plastics projects that total $71.7 billion in potential new U.S. investment. "Half of the announced investments are from firms based outside the U.S.," points out Cal Dooley, president and CEO of the ACC, "which means our country is poised to capture market share from the rest of the world."
Offshoring Isn't Always a Bad Thing
Although offshoring has taken on negative, sometimes sinister connotations (particularly during election years), "there are legitimate reasons why companies locate where they locate," says Moutray, "and if your customers are in China, it might make sense to produce in China."
"Just because something is produced elsewhere, that doesn't mean you're suddenly going to see this gravitation of those jobs back to the U.S.," he says. "In a global economy, production takes place around the world. If your suppliers are there and your customers are there, you need to be there. And in some cases, based on the country, you might legally need to be there."
Moutray says he prefers to use the phrase "increased investments in the U.S." because "reshoring" sometimes implies that those jobs never should have left the country to begin with.
"In a global economy we have to recognize that production takes place worldwide, and our goal in terms of U.S. policy should be to make sure that as much of that takes place in the U.S. as possible," Moutray says.
Moser agrees, noting that while most companies went to China to take advantage of the low labor costs, "they also went over there to produce in the 1.3-billion-person Asian market, which is growing at 10% per year, and that's a good strategy."
If We Build It, Will They Come?
A significant number in manufacturing circles is 6 million, which is the number of jobs U.S. manufacturing lost in the first decade of this century. Although BCG's study suggests that growth in exports plus reshoring efforts could eventually create as many as 1.2 million manufacturing jobs by 2020, two big questions still need to be answered:
• What will be the nature of those jobs?
• Who is going to actually fill those jobs?
Often lost in the debate over bringing jobs back from Asia is the reality that we already have a shortage of skilled labor in the U.S. Indeed, attracting and retaining a skilled workforce has consistently been one of the biggest challenges confronting U.S. manufacturing leaders, based on the quarterly NAM/IW Survey of Manufacturers.
"The average age of our member workforce when we survey them is often in the 50s, so you're going to see a lot of retirements in the next couple years," Moutray points out. "Young people say they love manufacturing but they don't necessarily want to go work for one. We need to clearly change some perceptions about what manufacturing is: It's a high-skilled, high-paying, advanced kind of career. And we also need to do a better job of developing those skills: welders, machinists, mechanics, etc."
Derry passes along a conversation he had recently with the chief purchasing officer of a major chemical company, related to the growth in the natural gas sector.
"This CPO told me, 'We're building plants in the U.S. for the first time in 20 years, and we can't find anybody with the expertise and skill base to build chemical plants in this country because the people who had those skills have moved on -- they've got different jobs.' That skill base isn't in this country because of 20 years of not having to deal with that hypothetical situation. Now we've got a very real, critical shortage of skills for companies that are trying to grow, to create jobs here, and they're scrambling to find people to fill that gap."
|Listen to NAM's Chad Moutray discuss rising optimism among manufacturers and their most pressing business challenges at www.industryweek.com/NAMIW-3Q13.|
For reshoring to truly have a positive, long-lasting effect in the U.S., what will be needed, Moser says, are automation, process improvement, a simplification of the tax code, a lowering of the tax rate on manufacturers, an end to offshore currency manipulation, and above all, better workforce training. "If you don't have the skilled workforce," he emphasizes, "all the rest of it is a waste of time."