By: Mindful Money
Offshoring – the phenomenon of jobs in the developed world being “outsourced” to emerging markets (mainly China) where labour was cheaper, workers’ rights weaker and environmental regulations less stringent – was one of the defining features of the advance of globalisation. But for how much longer?
Made in the USA?
Now it seems the trend is happening in reverse. A new survey by the Boston Consulting Group says that more than a third of US-based manufacturing executives at companies with sales greater than $1 billion are planning to "reshore" production to the United States from China or are considering it. At companies with $10 billion or more in revenues - a third of the sample - almost half (48%) are looking at it.
Seven out of 10 respondents agreed that "sourcing in China is more costly than it looks on paper". This is not just because wages in China are rising as the country's economy grows, although 92% of those questioned believe that wages will "continue to escalate".
Why manufacturing should be brought back home
Product quality, ease of doing business and proximity to customers were also cited as factors pushing customers to look closer to home. But there are less tangible - but equally crucial - reasons for the growth of reshoring. Apple, for example, has been caught up in the travails of Foxconn, one of its key suppliers, which has come under scrutiny for its treatment of workers following a spate of suicides, as outlined in this report from ComputerUK.
You're Just-In-Time for, more delays
A host of natural disasters ranging from the Icelandic volcano that shut down European airspace in 2010 to last year's Fukushima nuclear disaster and floods in countries ranging from Thailand to Australia have illustrated the fragility of extended global supply chains. While events in Australia disrupted the supply of coal and other basic commodities, Thailand and Japan's disasters caused severe problems for carmakers with operations in the two countries, such as Toyota and Honda, as Frost and Sullivan point out. Climate change is predicted to increase the number and severity of such disasters in years to come, with many of the Asian countries that have seen the most offshoring likely to be among the hardest-hit.
There's nothing wrong with lean supply chains operating on just-in-time principles - but they are a lot easier to run if suppliers are close by rather than on the other side of the world.
Hey, that was my idea
AMSC, a maker of components for wind turbines, illustrates another issue for companies that site production overseas - intellectual property. It saw its share price plummet after its main customer, Sinovel, abruptly cancelled orders and it was alleged that the Chinese company had stolen its technology and was installing it into turbines itself.
The two companies are currently locked in a court battle but even if AMSC wins, much of the damage has been done and it is just one of a number of cases that reinforces the perception that the rule of law is not as strong as in the US and Europe. This arbitrary approach to due process is also apparent in the current frenzy over Bo Xi Lai in China, where a lack of clarity over the leadership transition is unsettling business leaders. China's rulers also seem exceptionally jittery about the possibility of the Arab Spring spreading east, leading them to unpredictable and sudden responses of the type that make executives nervous. Governance standards are a real concern, both in businesses and in government.
Our energy is cheaper than yours
Another key factor, as Philip Verleger, director of energy policy in the Carter Administration, points out in this FT article, is that the US now has cheap energy in the form of shale gas - an advantage that will "contribute permanently to a big improvement in the competitive position of the US". At the same time as the price of the fuel that will power US industry falls, the price of transport fuel to ship goods to the country is increasing, further reducing the offshorers' cost advantage.
Make it yourself
BCG identifies several sectors where China's cost advantage is likely to shrink in the next few years to the point where it makes sense to produce goods in the US. "These tipping-point sectors are transportation goods, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics," the consultancy says.
The US is not just reclaiming jobs from the Far East, it is also likely to take them from Europe, too, as a result of the weaker dollar and the instability caused by the seemingly never-ending eurozone crisis.
President Obama will no doubt want to highlight the reshoring phenomenon during his re-election campaign, given that "reshoring is an efficient way to reduce imports, increase exports and regain manufacturing jobs in the US. It's also the fastest and most efficient way to strengthen the US economy," according to the Reshoring Initiative.
Reshoring: Not so fast
But while the reshoring phenomenon is gathering pace, previous outsourcing will not be entirely reversed - and even if jobs do move from China, they won't all go to the US. Some of them are going to places where labour is still cheap, such as India, Bangladesh and Vietnam, and some are moving to cheaper areas within China. The country is still on track to be the largest economy in the world and if you want to sell your products there you are likely to have to make them there, too.