Faced with a host of factors—including rising labor wages, limited access to skilled labor and the need for shorter supply chains and lower shipping costs—executives at U.S.-based companies increasing took a favorable view of reshoring last year. Now, the lower costs associated with reshoring are driving more local manufacturing activity, technological developments are drastically changing the way plants operate, and capital investments are on the rise—all of which point to a “landmark year for American manufacturing,” says John Zegers, director of the Georgia Center of Innovation for Manufacturing.
In a recent article that ran on Industry Today, Zegers explains that he regularly consults with manufacturing companies of all shapes and sizes on a wide range of projects. Over the past year, those consultations led him to his favorable view of the U.S. manufacturing landscape. As he explains, when it comes to operational decision making, manufacturers evaluate critical factors such as transportation and energy costs; market demand for products; rising labor costs in China and other developing nations; access to talent, tax, and regulatory policies; availability of capital; and currency trends. In 2015 we will see jobs continuing to come back to America as trends around these divergent areas continue to work favorably for bottom lines, Zegers says.
In particular though, Zegers writes that the cost of natural gas in the U.S. will play a significant role in reshoring initiatives. The growing abundance of natural gas in the U.S. provides more affordable energy for factories, as well as new opportunities for products and services. In the article, Zegers cites a PricewaterhouseCoopers estimate that high shale gas recovery and low prices could add one million U.S. manufacturing jobs and reduce natural gas costs by up to $11.6 billion annually through 2025.
It also is important to look at the manufactured goods themselves. Generally, heavier goods equal higher shipping costs, a value-to-weight ratio that expands in concert with the distance between where they’re made and their market destinations, Zegers writes. Higher transportation costs, combined with increasingly expensive labor rates in distant countries such as China, lead manufacturers of heavy equipment and steel products to shift production from overseas back to the U.S., where these products are also sold. Therefore, shortening the supply chain has become a significant value proposition, says Zegers.
It’s worth noting, however, that it doesn’t always make sense to reshore. So, for example, if very low-cost labor is employed, it probably wouldn’t make sense to reshore, Zegers writes. The same obviously holds true for companies with heavy foreign demand because it’s cheaper to manufacture in the location where the products will be sold.
Reshoring continues to be intriguing, all the same. Last fall, Boston Consulting Group conducted a survey of senior manufacturing executives at companies with sales of $1 billion. The number of respondents who said their companies are already bringing production back from China to the U.S. had risen from roughly 13 percent to 16 percent over the past year. The number who said their companies would consider returning production in the near future also grew from about 17 percent to 20 percent of the respondents since the previous year’s survey.
To be fair, interest in near-shoring to countries such as Mexico, and adopting a regional model of manufacturing worldwide is growing as well. However, in some instances, regional manufacturing may entail reshoring to the U.S.
What are your thoughts on reshoring? Is your company considering such an initiative? If so, how does the cost of natural gas factor into those discussions?