The Reshoring of Manufacturing Activities Surges
15 Nov, 2012
By Brian Gallagher
Manufacturing companies cannot afford to ignore the reshoring movement to bring production back to the U.S. from leading Asian, European and South American countries. But before spending valuable dollars to relocate production facilities, conducting a comprehensive cost-analysis of overall benefits, as well as company-focused advantages and disadvantages for every aspect of production, is a crucial part of the process.
An estimated 40 percent of manufacturing companies in high-quality, technology-driven industry sectors like aerospace and defense have already relocated manufacturing assets to the United States, citing lower labor and energy costs as driving forces. As more manufacturers follow suit, this surge in U.S. manufactured exports and jobs created as a direct result of reshoring is expected to create between 2.5 million and 5 million additional American jobs in factories and related services by the end of the decade, according to a recent study by The Boston Consulting Group (BCG).
The United States is projected to have an export cost advantage of 5 percent to 25 percent over Germany, Italy, France, the United Kingdom and Japan by as early as 2015, according to the report. This advantage would translate into as much as $90 billion in additional U.S. exports per year, and a total of $130 billion in annual gains when factoring in exports to the rest of the world, the analysis says.
However, reshoring presents significant challenges in some industries. Manufacturers face hurdles from new health care legislation, stringent EPA and emissions regulation guidelines, and corporate tax rates in flux.
Still, the benefits are compelling.
With rising labor and currency rates in countries such as China, as well as higher energy and transportation costs, the United States can offer appealing cost savings. In the study, the BCG predicted that labor costs of large developed economies overseas will be 20 percent to 45 percent higher than those in the United States.
Resources like skilled labor, land, facilities and natural gas also are more readily available and cost-effective in the U.S. For example, natural gas is likely to remain 50 percent to 70 percent cheaper than in Europe and Japan, resulting in significant savings in electricity generation, for fuel used to power industrial plants and for feedstock used in industrial processes, according to the BCG study.
In addition to cost savings, manufacturing companies are reshoring to avoid problems with product quality and intellectual property disputes. By manufacturing goods closer to where they are sold, companies can enjoy lower distribution costs and ensure quality standards are met and intellectual property remains safe.
Keeping production local to domestic markets also makes financial and logistical sense for manufacturers. Rising shipping rates and oil prices overseas means an automatic savings in transportation costs for the United States, both as an import and export base. For example, because of a closer proximity to Japan, shipping goods from the U.S. to Japan is about 59 percent cheaper than shipping from Europe to Japan. Therefore, the United States will be significantly more cost competitive than Europe as an export base for goods exported to Asia. Combined with the weak U.S. dollar, American and overseas manufacturing companies can now get more bang for their buck by investing in the United States for expansion and production.
Who’s Making the Return Trip?
Industry sectors leading the reshoring trend include technology-driven manufacturers, such as aerospace and defense, industrial parts and equipment, electronics, medical and surgical supplies and chemical processing. Japan-based Toyota, for example, recently announced plans to export Camry sedans assembled in Kentucky and Sienna minivans made in Indiana to South Korea. Other Japan-based auto OEMs, Honda and Nissan, are also poised to increase exports of vehicles made in their U.S. plants.
In the Southeast United States, Germany-based Siemens is building gas turbines in North Carolina to ship to Saudi Arabia for construction of a 4-gigawatt power plant, and England-based Rolls-Royce recently opened a new aircraft engine parts manufacturing facility in Virginia.
“The trend seems to be spreading throughout the Southeast,” says Kevin Bean, president and CEO of O’Neal Inc., a full-scale, full-service project delivery firm headquartered in Greenville, S.C. “We are noticing a steady increase in the number of companies looking for reshoring opportunities, and our firm is becoming a leader in reshoring procurement.”
O’Neal recently helped a European-based chemical processing company define the cost schedule and overall project scope in an effort to make its manufacturing investment in the United States. The company is now in the process of bringing certain process manufacturing lines from China and other countries to the United States. O’Neal also recently acquired projects with companies in North Carolina, South Carolina, Georgia, Louisiana, Pennsylvania and Texas that otherwise would have gone overseas.
While it may take a sizeable upfront investment to move overseas production back to the United States, manufacturing companies stand to gain valuable returns by reshoring. This reshoring trend will continue to have a positive impact on the economy as manufacturers, vendors and suppliers are generating revenue and creating jobs.
Brian Gallagher is director of marketing for O’Neal Inc. and has more than 20 years of experience in the architecture, engineering and construction industry. For more information, email Brian at firstname.lastname@example.org.