A Trend That Never Left The Station
By Richard A. McCormack
The "reshoring" trend of American companies bringing production back to the Untied States because of low domestic energy prices and surging labor rates in China is a myth, and always has been a myth, according to A.T. Kearney.
The company's latest U.S. Reshoring Index indicates that offshore outsourcing of American manufacturing production continues to grow at a faster pace than reshoring of production back to the United States. It also finds that the number of factories that have returned to the United States is tiny.
In 2015, A.T. Kearney could only identify the return of 60 factories back to the United States. Many of these were small facilities, and three-quarters of them were cases of companies returning to an existing building and starting up old equipment, "and in some cases even pulling people out of retirement to operate it," says A.T. Kearney Partner Patrick Van den Bossche.
Few of the reshoring cases A.T. Kearney identified in 2015 represented an investment by a U.S.-based manufacturing company in a new greenfield facility.
"The strong dollar, historically low oil prices and the overcapacity in ocean freight and resulting downward impact on freight rates all had us suspect that it wouldn't be a pretty story" for reshoring in 2015, says Van den Bossche. "But even before that, the lack of skilled manufacturing laborers and the supplier and service provider ecosystems that had disappeared years ago were already seen as putting the brakes on the reshoring movement."
The U.S. Reshoring Index indicates that for the fourth consecutive year, American companies were more busy outsourcing production overseas than they were reshoring production back to the United States. A.T. Kearney's Index dropped to -115 down from -30 in 2014 "and it represents the largest year-over-year decrease in the past 10 years," says the firm.
"Based on our data, we conclude that the reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration," notes Van den Bossche. "The 2015 data confirms that offshoring seems only to be gathering steam, while the U.S. reshoring train that so many predicted has yet to leave the station."
It doesn't look like there is anything that will stop the offshore outsourcing trend. The Obama administration is slowly starting to create a network of manufacturing research institutes, but there are no guarantees that those institutes will create the infrastructure necessary to re-establish American supply chains and a skilled workforce. The Trans Pacific Partnership could lead to further outsourcing, as companies open factories in low-labor-cost countries like Vietnam and ship products back to the United States duty-free. The U.S. political uncertainty associated with the 2016 presidential elections could "further weaken the case for reshoring," states Van den Bossche. "The recent increase in nearshoring to Mexico also seems to indicate that, even if U.S. companies consider leaving Asia, they may choose to stop south of the border."
Right now, the only factors that could reverse the offshore outsourcing trend are "unexpected events," says Van den Bossche. The dockworkers' strike in early 2015 had companies reconsidering their foreign production plans, but there likely won't be another dockworker strike for another four years, since that is when the current contract expires.
"Developments in the areas of digital manufacturing, 3D printing and the Internet of Things will completely change cost dynamics across the whole supply chain, so the speed with which these developments materialize will also factor into companies' reshoring decisions," states Van den Bossche. Unfortunately for the American economy and workforce, these technologies require a skilled workforce "and that's one obstacle U.S. manufacturing has yet to overcome," he adds.
In analyzing the new manufacturing announcements, A.T. Kearney found that it is not American companies that are reshoring production, but foreign firms that are "making a much more valiant effort to set up manufacturing here," says Van den Bossche. Since 2012, foreign companies have increased the total size of their U.S. workforces by 50 percent, growing from 1.6 million Americans working for foreign manufacturing entities to 2.4 million. Foreign companies now employ 20 percent of the total U.S. manufacturing workforce. During the same period, the overall U.S. manufacturing workforce did not increase -- indicating that American companies were not adding many jobs.
But a foreign company building a manufacturing plant in the United States is not a case of reshoring. It is a case of foreign direct investment.
"We're continuing to buy more stuff from overseas and getting rid of jobs," says Van den Bossche. "It was actually foreign companies that were buying companies here and were setting up shop, making billion-dollar investments, and a number of those have actually been Chinese companies."
The Chinese companies moving to the United States have realized that the low-cost, low-quality business model they were pursuing in China does not bode well for their future wellbeing. "We're seeing a lot of automation and a lot more hiring of people from Germany and Japan to teach them lean," says Van den Bossche. "They are going really high end."
There are examples. Fitzker Automotive and battery producer A123 Systems were purchased by Chinese auto parts maker Wanxiang Group, which owns a total of 13 plants in the United States. Tianjin Pipe Group invested more than $1 billion in a 235-acre manufacturing facility in Gregory, Texas. Golden Dragon Copper established a plant in Pine Hill, Ala. Zhejiang Geely has announced plans to open a new plant in South Carolina to produce its Volvo automobile.
Is there a way for the United States to turn the situation around -- where it becomes economically attractive for companies to bring production back? "Quite frankly, I don't know in the short term if there are any government policies that can do that," says Van den Bossche. "If you are a company looking at coming back and you are not finding the supply chain ecosystems or the labor that you need, you are going to think twice about coming over here."
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