By Chris Sweeney, Crain News Service
AKRON (March 20, 2015) — Manufacturing in America has not reached pre-recession levels yet. Slowly but surely, however, it is turning around.
According to the Alliance for American Manufacturing (AAM), the U.S. has added about 786,000 manufacturing jobs since losing about 2.3 million in the last recession. And while reshoring has not made a widespread impact on that figure, it is doing its part to help.
AAM President Scott Paul said it is hard to say precisely how much of those 786,000 jobs were created as a result of reshoring, but the Reshoring Initiative estimates anywhere from 30,000 to 40,000 jobs were reshored in 2013, compared to about the same amount being offshored. While the two negate one another, it is better than 2003, when the Initiative said about 150,000 jobs were offshored compared to about 2,000 reshored.
Reshoring has helped stop the bleeding. And with wages around the world increasing, the U.S. could turn the scales in the next five to 10 years.
“China has gone from being so cheap you almost didn't have to count the cost to being measurable and getting significant,” said Harry Moser, founder of the Reshoring Initiative. “Many articles would say the average hourly cost in China is about one-third of the U.S. level. As that unit labor cost get closer to the U.S., all those other factors that were safe to ignore before become important and are in some cases sufficient to overcome that residual labor cost gap.”
Logistics is arguably the most impactful of the non-labor related factors for companies that choose to reshore because it potentially can be expensive to ship product from overseas.
Mr. Moser said it is important to consider total cost of ownership, which includes carrying the cost of inventory, traveling cost and the impact of innovation when you have engineering and assembly separated. He said once all factors are taken into account, the two costs get closer to equilibrium.
There's also the possibility of dealing with an unreliable company leading to other issues as Test Tools Inc. found out. The current ownership had inherited a decision to offshore production of two rubber end caps used in the assembly of its Block-Chek product to China.
Block-Chek is a combustion leak tester that quickly diagnoses a blown gasket, cracked head or block, pulled bolts and studs, and warped sealing surfaces.
The Chinese firm had become unreliable. Kristin Gray, Test Tools co-owner, said it got to the point where Test Tools couldn't rely on the company to deliver even within months and had to put its customers on backorder.
China would ship these products to the East Coast, then transport them by rail to Test Tools' facility in Seattle. Whenever they were backordered, Test Tools had to pick up the cost for the Chinese firm to air-deliver parts so Test Tools could satisfy it customers until the rail shipment arrived.
“It got very expensive because they would inevitably blame the China factory, and the shipments, then wouldn't pay to air-ship the parts to us,” Ms. Gray said. “Nobody would ever accept any kind of blame or responsibility. The fingers were pointing left and right. We were the ones who got stuck in the middle.”
Test Tools decided in March 2014 to switch production of the end caps to Yokohama Industries America, receiving its first shipment from the U.S. based non-tire subsidiary of Yokohama Rubber Co. in June 2014. While the cost difference in tooling was about 10 to 15 times more, Ms. Gray said delivery to date has been consistent.
Test Tools now owns the tooling of the rubber end caps.
“I don't think our customers noticed a big difference. They started getting what they were asking for,” Ms. Gray said. “But if we were constantly having to backorder over a long period of time, sooner or later your customers are going to go somewhere else.”
Other firms have reshored for similar reasons. The Reshoring Initiative analyzed the top reason firms gave in several hundreds of cases of reshoring, and freight cost was No. 4, inventory was No. 6, delivery was No. 8, and travel cost/time was No. 11. If all four issues were combined into a general logistics category, it would have been the No. 1 issue.
Mr. Paul said many firms tend to discover it is much more difficult to predict shipping costs, control inventories across the ocean and to get quality issues resolved in a timely manner. And some companies have had their intellectual property stolen in countries with laws not as strict as the U.S. or experience political instability and unexpected costs in dealing with the governments.
“When you start to add all that up, it can look a little less attractive to source overseas than in the U.S. even if there is a gap in labor costs,” he said.
Means to a renaissance
Mr. Paul said two main factors have led to the turnaround: Mainly an improving U.S. economy and a major turnaround in the automotive sector thanks to the Obama administration's rescue of General Motors Co. and Fiat Chrysler Automobiles.
Despite reshoring being a distant third, Mr. Paul said the trend of offshoring production to lower wage countries is reversing as companies seek to localize production in the region where they sell their products. He highlighted the rubber and plastics sector as one that has ripe opportunities for more reshoring because of an advantage in energy cost and the availability of resources.
“I think that will open up a number of possibilities in the years to come as sourcing decisions get made,” Mr. Paul said. “As we see more decision points come up on sourcing, there will be more consideration to producing in the U.S.”
Mr. Moser said that had reshoring not occurred since the recession, the U.S. would have added about 150,000 fewer jobs. While the U.S. has not climbed all the way out of the recession yet, the swing in reshoring is encouraging.
“We don't try to defend the renaissance in manufacturing,” he said. “We don't say reshoring is the renaissance, but a means to achieve the renaissance.”
This report appeared on the website of Rubber & Plastics News, an Akron-based sister publication of Tire Business.