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On-shoring: More Chatter than Action

07 February 2013

For more than two decades, it was a foregone conclusion that a large portion of the production of electronics just had to go to low-cost locations, predominantly in Asia. After all, folks across the industry were shown slide after slide demonstrating how much more expensive it was to build assemblies in high-cost regions compared to low-cost regions such as China because the labor cost was simply too high here and too low there. After seeing direct labor rates in China less than 10 years ago rise from sub-$1.00 per hour, including benefits, to more than $34 per hour, including benefits, in some coastal regions today, “re-shoring” or “on-shoring” some production “back home” has been receiving quite a bit of news coverage.

But is it warranted? Manufacturing wages in the United States increased by just under 3% a year between 2000 and 2010, according to IHS Global Insight. By comparison, manufacturing wages in China rose by more than 15% a year over the same period. Even at this pace it will take another 13 or 14 years before wages in China reach equilibrium with wages in the U. S.

So the media attention can't all be about the rise in China’s direct labor costs. Based on conversations I’ve had with industry contacts as well as published interviews with senior executives across the outsourced manufacturing industry, it appears that there is a significant amount of interest in on-shoring, but not necessarily a lot of movement at the current time.

In a July 2012 study of 108 U.S.-based manufacturing companies conducted by David Simchi-Levi, an engineering professor at MIT, it was reported that 33% of U.S. manufacturers were considering moving some manufacturing back to the U.S., but only 14% had definite plans to do so. The survey noted faster time-to-market, reduced transportation costs, product quality, and protection of intellectual property to be among the major considerations for on-shoring production. Rising labor costs in China were not the motivator.

I can’t help but wonder what role the discussions about on-shoring are playing as companies lobby for lower tax rates here in the U.S. In the MIT study, 21% of companies noted “pressure to increase U.S. jobs” as a reason why they are considering on-shoring. And 68% said “corporate tax reductions” would help accelerate the on-shoring process. It’s hard to argue for tax reform if you are still pushing more manufacturing offshore.

The CEO of Flextronics noted in a Wall Street Journal article on January 4, 2013, that the return of manufacturing to the U.S. is likely to be a “slow and evolving process.”

I wholeheartedly agree with this assessment. I also believe certain industries are going to be much slower to move back. In my view, the higher the production mix and the greater the level of product customization (and I’m not just talking what color you want the product to be) will drive production back to the U.S. given the need for faster supply chain responsiveness, higher stock-out costs and the need to drive down inventory costs.

Still, there have been a few well-publicized announcements by high-volume companies such as Apple and Lenovo to re-shore a very small portion of PC production to the U.S. In both cases, it appears the primary reason is to offer faster response and higher level of customization for very specific customer sets.

This is a start. And the results of the MIT Study mesh well with what we're seeing at this time: a lot of chatter, plenty of head-nods that it makes more sense now, but not a whole lot of real movement. Clearly, this is an interesting trend that I’ll be watching closely.

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