Is Reshoring a Myth or Reality?

Michele Nash-Hoff

When I first started talking about saving America manufacturing and returning manufacturing to America four years ago after the first edition of my book, Can American Manufacturing be Saved? Why we should and how we can, came out, I was met with a great deal of skepticism. Some typical comments were:  “I don’t think we can.” “It’s too late.” “I wish we could.” “We need to.” Very few thought we actually could return manufacturing to America.

A lot has changed in four years. At last week’s Del Mar Design and Electronics Show (DMEDS) in San Diego, CA, a very successful fellow manufacturers’ sales rep, stopped me in the parking lot and said, “I used to think you were nuts, but you were right. Manufacturing is returning to America.” While this manufacturers’ representative sales agency is headquartered in southern California, it has affiliate companies in Mexico, Malaysia, China (Beijing, Shanghai, and Shenzhen) and Taiwan (Taipei and Hsinchu) so I did not take this admission lightly.

The theme of this year’s DMEDS was “The Re-Birth of American Manufacturing, and it featured a full-day Reshoring track. This track began with my presentation on “Reshoring: Bringing Manufacturing Back to America Using Total Cost Analysis and ended with “Reshoring:  What is a Fit and How Can it Save Your Company Money?” This track also featured “Lean Manufacturing is the Path to Operational Excellence,” “3D Printing:  What it is, Isn’t, Will Be and Won’t Be,” and “Save Your Factory with Robotic Automation.”

While there were offshore companies exhibiting at DMEDS, it was dominated by U. S. manufacturers, regional contract manufacturers, and local sales reps and distributors. The buzz at the show was that manufacturing is returning to America, and every contract manufacturer I spoke to at the show had experienced a “reshoring” event.

In the past year, there have been numerous articles debating whether “reshoring” is a myth or really happening. For example, the cover article of the April 22, 2013 issue of Time magazine was “Made in USA – Manufacturing is Back ? But Where are the Jobs? The first page of the article is full of pictures of products that have returned from offshore, representing an unbelievable cross section of consumer goods, ranging from toys such as the Frisbee. Slinky and Crayola crayons to electric mixers, barbecues, saws, hammers, and many more.

The reason the article poses the questions about how many jobs are being created by the return of manufacturing to America is that the manufacturing plants of the present and future have more machines and fewer workers than in the past. Robotics, automation, and lean manufacturing are helping companies do more with fewer people, and the rapidly improving technology of additive manufacturing is changing the way parts are being made.

The article featured a glimpse of manufacturing’s future in the stories of two companies:

• ExOne, near Pittsburgh, PA, providing Digital Part Materialization (DPM) that transforms engineering design files directly into fully functional objects using 3D printing machines
• GE’s highly automated battery factory in Schenectady, NY.

ExOne needs only two workers and a design engineer per shift to support its 12 metal-printing machines. The GE plant produces Durathon sodium batteries that are large and powerful enough to power cell phone towers. Because of being highly automated, the plant only employs 370 high-tech workers in a 200,000 sq. ft. facility.

What was most encouraging to me was that the article reported that Ashley Furniture is building a new plant south of Winston-Salem, NC that will employ 500 people. This is an industry that even I doubted would ever come back to the U.S.

Key statistics pointed out in the article were that China’s average hourly wage was only $0.50 in 2000 but is projected to be $4.50 by 2015. This is probably a conservative estimate because China’s wages rose by 15-20% over the last five years but are expected to increase by another 60% in 2013 alone. Another factor noted is that the cost to ship a 40-ft. container from China to the West Coast rose from $1,184 in 2009 to $2,302 this year. These facts corroborate the Boston Consulting Group’s 2011 report that there will be a convergence in the total costs between China and the U. S. by 2015.

This quote from GE CEO Jeff Immelt concluded the article:  “Will U.S. manufacturing go from 9% to 30% of all jobs? That’s unlikely. But could you see a steady increase in jobs over the next quarters and year? I think that will happen.” I agree and so does Harry Moser, founder of the Reshoring Initiative and developer of the Total Cost of Ownership TM spreadsheet.

Mr. Moser’s organization promotes and tracks cases of reshoring across the U.S. He estimates that between 2010 and 2012, about 50,000 jobs were created in the U.S. because of the trend—which equates to 10% of the 500,000 manufacturing jobs created in the past three years.

On the myth side of the debate, the 2012 Hackett Group’s report, “Reshoring Global Manufacturing:  Myths and Realities” by Michel Janssen, Erik Dorr and David P. Sievers

states, “By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate.” However, they conclude that “few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries.

Using hard data from their 2012 Supply Chain Optimization study, they analyzed the trend in “reshoring” of manufacturing capacity, and their findings debunk the myth that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. The report states, “The reality is that the net amount of capacity coming back barely offsets the amount that continues to be sent offshore.”

The report also offers recommendations on how companies should plot their manufacturing sourcing strategies. Interestingly, their recommendations incorporate some of the factors that Mr. Moser and I include as part of a Total Cost of Ownership analysis, such as “integrate the views of manufacturing, procurement, finance and business-unit leadership,” “Establish a game plan to deal with risk: Geopolitical, supply base, environmental and commodity risks are a given,” “Establish a proactive approach to anticipate risks, creating mitigation plans with clear triggers for implementation,” and “Broaden the decision making approach beyond total landed cost.”

The Hackett Group’s definition of “Total landed cost” is not as broad and encompassing as the definition of Total Cost of Ownership I provide in the 2009 edition of my book and that Mr. Moser uses in the TCO spreadsheet he developed in 2010. Their definition is “Total landed cost is the set of end-to end supply chain costs to transform raw materials and components into a finished
good ready for sale. Key components include: raw material and component costs, manufacturing costs (fixed and variable), transportation and logistics, inventory carrying cost, and taxes and duties.

My definition of TCO includes the “hidden costs of doing business offshore,” such as Intellectual Property theft, danger of counterfeit parts, the risk factors of political instability, natural disasters, riots, strikes, technological depth and reserve capacity of suppliers, currency fluctuation. Mr. Moser’s TCO spreadsheet includes calculations for factors such as Intellectual Property risk, political instability risk, effect on innovation, product liability risk, annual wage inflation, and currency appreciation.

While the number of companies bringing products lines back to America is increasing, I have to admit that as manufacturers’ sales reps for all American companies; we are still losing business to China for individual parts our principals are quoting. Just recently, we lost several rubber parts that our rubber molder has made for a customer in our territory for 15 years. Our customer had been purchased by a multinational awhile back that has a subsidiary in China, so the new management decided to tool up these parts in China and discontinue ordering them from our molder. I am sure that the decision was made based on the lower piece price without doing a TCO analysis.

You can help your company get the most value for its dollars and help return manufacturing to America by doing the following:

• Use the TCO spreadsheet available for free at www.reshorenow.org
• Use the archived webinars to inform staff and customers
• Work with groups being trained on TCO – Manufacturing Extension Program (MEPs) sites around the country
• Prepare your workforce for reshoring
• Submit cases of reshoring for publication and posting using the Reshoring Initiative’s  template
• Sponsor the Reshoring Initiative

I strongly believe that if more companies would learn to understand and utilize the TCO estimator spreadsheet of the “Reshoring Initiative,” they would realize that the best value for their company is to source their parts, assemblies, and products in America. Doing this would help return manufacturing to America to create a far higher percentage of jobs than the 10% that have been brought back to America thus far and help maintain more manufacturing in U. S.

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