As production costs overseas rise, many companies that once moved their manufacturing operations overseas are now returning them to the United States. Companies that once relocated to China, India, Vietnam, the Philippines and other countries where expenses were minimal are finding that the economic advantages of manufacturing goods overseas have been marginalized. Because it is not as economical as it once was to produce goods overseas, a re-shoring trend has developed in the manufacturing industry.
Factors Driving the Re-shoring Trend
Just as companies moved their factories from the United States to countries overseas for several reasons, there are also several factors driving the return to the United States. The two primary factors driving this re-shoring trend are labor costs and transportation costs.
First, the difference between labor costs overseas and labor costs in the United States is diminishing. Many companies initially moved their manufacturing operations overseas because labor costs were so low. Today, wages in China and other Asian countries remain only a fraction of what United States employees earn, but the discrepancy is lessening each year. In recent years, for instance, wages in China have increased by 15 percent annually. Meanwhile, major companies in the United States have been able to manage their state-side labor costs through restructuring and renegotiating contracts.
Second, transportation costs are increasing. As the costs of moving finished goods from one country to another increases, it is obviously preferable to make goods close to where customers will be purchasing them. In addition to the increase in transportation costs recently, domestic energy costs have remained relatively stable and low. Energy and pollution will only become more important to the manufacturing industry, and right now these factors are driving companies back to the United States.
Finally, consumers are realizing the quality of American-made products. Value trumps cheap.
Notable Companies are Moving Back
Companies large and small have moved back to the United States. One of the household names that has re-shored is GE, which remodeled one of its plants in the United States so they could manufacture high efficiency dishwashers. Whirlpool and Ford are two other major companies that have returned operations to the United States in recent years. Along with these Fortune 500 companies, numerous small companies have also moved their factories back to the states as well.
Advantages of Re-shoring
Each company can calculate whether labor costs and transportation costs make re-shoring financially viable. Re-shoring has many other benefits as well. However, these can be more difficult to apply a financial value. Re-shoring:
- lowers the total cost of ownership
- increases consistency and improves quality
- facilitates just-in-time operations by reducing surge and pipeline inventory
- lowers intellectual property risks
- lowers regulatory compliance risk
- reduces pollution
- encourages innovation by clustering R&D and manufacturing