Re-shoring is becoming fashionable

3 Dec 2012 by Jim Fickett.

There is an interesting article in the Atlantic entitled, The Insourcing Boom, in which it is suggested that offshoring went too far and is now being reversed.

The article is based on anecdotes and does not present any really substantial data, however it does seem that this is the new trend passed between CEOs on the golf course:

Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made [namely, to bring back some manufacturing from overseas].

A number of reasons are given:

  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
  • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
  • American unions are changing their priorities. [GE's] Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
  • U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore. …

But many of those hidden costs come later. In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation. And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment. “All you need is to have to hire one or two 747s a couple times to get product here in a hurry,” says Shook, “and you lose those savings.” …

manufacturers now have more proprietary technology to protect …

(See also Too much offshoring endangers future innovation.)

The claim is made that the recovery in manufacturing jobs since the last recession is stronger than expected from the business cycle, and provides evidence for a manufacturing renaissance. Perhaps. It is true that all jobs are up 3.5% since the low at the beginning of 2010, while manufacturing jobs are up 4.4%. But looking at the historical data, it is hard to feel that this is really a renaissance. Here is a comparison of the long-term trend in manufacturing jobs with that in all jobs:

And here is a history of US manufacturing production:

In reality a number of complex trends are interacting. It is probably true that many CEOs are realizing the Chinese market is not as easy to make money on as they hoped, and that offshoring does not save as much money as they hoped. And it is true that natural gas is cheap, for now, so that a number of companies are moving overseas facilities back to the US in order to take advantage of cheap energy (The shale gas boom has been very helpful to US manufacturing). But natural gas prices will rise, some offshoring of unskilled jobs will continue, and automation of skilled but repetitive jobs will also continue (A major cause of jobless recoveries is recession-related switches to automation), meaning that bringing back manufacturing will not bring back the glory days of the blue collar worker.

Still, the trend among CEOs to look seriously at moving manufacturing home again is a hopeful one for the US economy, and bears watching.