Reshouring

Coming home

A growing number of American companies are moving their manufacturing back to the United States

IN 2005, A START-UP company from California called ET Water Systems decided to move its manufacturing operations to China. At the time there was a general exodus to Asia in search of lower costs, recalls Mark Coopersmith, the firm’s chief executive. ET Water Systems, which builds sophisticated irrigation devices for businesses, quickly started losing money, not least because it had so much capital tied up in big shipments of goods which took weeks to cross the oceans. Innovation suffered from the distance between manufacturing and design, and quality became a problem too.

When five years later Mr Coopersmith investigated the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door. ET Water Systems’ new manufacturing partner, General Electronics Assembly, is in San Jose. As it happens, the firm’s owner has a Chinese background and a large portion of its employees are of South-East Asian origin.

The number of firms known to have “reshored” manufacturing to America is well under 100. Doubtless many more are doing so quietly. Examples range from the tiny, such as ET Water Systems, to the enormous, such as General Electric, which last year moved manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky which not long ago had been expected to close. Google has attracted a great deal of attention for deciding to make its Nexus Q, a new media streamer, in San Jose.

The reshoring movement has to be kept in proportion. Most of the multinationals involved are bringing back only some of their production destined for the American market. Much of what they had moved over the past few decades remains overseas. And for many of the biggest firms the amount of work that they are still sending abroad outweighs the amount that they are bringing back onshore. Caterpillar, for example, is opening a new factory in Texas to make excavators, but has also just announced that it will expand its research and development activities in China.

According to a survey conducted by Harvard Business School last year, many firms are still deciding against basing activities in America. Professors Michael Porter and Jan Rivkin asked HBS alumni who were running businesses about their choices of location and found that many of them were deciding to leave because they thought wages abroad were lower than at home. Another important reason, though, was to be near customers in big new markets, which this report does not see as offshoring in the conventional sense. Messrs Porter and Rivkin argue that firms are now ready to reconsider offshoring. They realise that in many cases they overdid it, and are discovering hidden costs in moving production a long way from home. But, the authors argue, America’s government is not making the country’s business environment attractive enough for companies to want to come back.

Given the political pressure, it is natural for companies to want to publicise anything that looks like reshoring. Lenovo says that its decision to bring back computer-making to North Carolina was a way of looking after the firm’s reputation as well as bringing direct business benefits. The Chinese firm’s global supply-chain chief, Gerry Smith, says he has received dozens of telephone calls from former university classmates to congratulate him on the move.

But reshoring amounts to much more than public relations. It is being driven by powerful forces and will only get stronger. In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers. The most common reason given was higher Chinese labour costs. The Massachusetts Institute of Technology looked at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm plans to bring some manufacturing back to America and one-third were actively considering such a move. A study last year by the Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing, produced similar results. It expects the outflow of manufacturing from high- to low-cost countries to slow over the next two years and the reshoring to double over the previous two years. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.

The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.

By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent, and when they happen, says one executive, the government often tells the plant manager to meet workers’ demands immediately. Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its Chinese workers a 47% pay rise after strikes in 2010. Foxconn Technology Group, a subsidiary of Hon Hai Precision Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing.

The pushmi…

BCG used to argue that companies unwilling to send their manufacturing to lower-cost countries were putting their very future in jeopardy.

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