As rhetoric—and tweets—about imposing so-called “big border tax,” or tariffs of 35 percent, on goods imported to the U.S. from Mexico increase, it’s worth observing how companies, and industries, respond.
For example, FCA, the U.S. arm of automaker Fiat-Chrysler, recently announced it would invest a total $1 billion in plants in Michigan and Ohio, which will add 2,000 new jobs in the U.S. In a statement, FCA clarifies that the plans are “consistent and combined” with investments announced last year, and are a “continuation of the efforts already underway to increase production capacity in the U.S. on trucks and SUVs to match demand.” The plans, the company further notes, will help solidify the U.S. as “a global manufacturing hub” for its flagship brands.
It’s worth pointing out that FCA’s announcement came days after Ford Motor Company decided to scrap its plan to build a facility in Mexico, instead opting to invest in a plant in Michigan. Ford’s CEO Mark Fields said evolving demand—rather than the policies of President-elect Donald Trump, who has vowed to impose a “border tax” on companies that send jobs abroad—was the reason for the change.
It isn’t just companies in the auto industry, however, or simply those companies targeted by Trump, that are increasingly exploring the economics of moving production to the U.S. Indeed, a proposal to apply a border-adjustment tax to products that are imported into the U.S. while exempting exports encourages businesses to re-examine their supply chains, an article in the Wall Street Journal explains. Consequently, contract manufacturers say they have seen an increase in calls asking about the possibility of shifting some production to the U.S. since the election, the article reports.
“We are starting to get more and more requests to do more analysis,” Mike McNamara, chief executive of Flex Ltd., a Singapore-based contract manufacturer with operations around the world, says in the article. Although it’s early in the process, McNamara says he expects some manufacturing to be relocated to the U.S.
The factors that influence where a company decides to source a component or product vary by industry. A company’s willingness to reshore manufacturing to the U.S. might be driven by the location of customers and parts, as well as the labor costs, taxes, duties and lead times, or a combination of those factors.
On the one hand, shifting the manufacture of some high-tech products, such as smartphones, to the U.S. isn’t likely to generate much benefit for a company. That’s because more than 90 percent of the supply chain for components is embedded in Asia, Marco Gonzalez, chief operating officer for the Americas at contract manufacturer Sanmina Corp. says in the WSJ article. Some parts simply aren’t available in the U.S., and moving operations to the U.S. would hurt margins, he says.
Then again, consider, for example, the case of Microtronic, which moved some of its manufacturing to the U.S. in 2015. The maker of semiconductor inspection equipment used to import a fabricated aluminum part from Eastern Europe, the WSJ article reports. The price was 20 percent to 25 percent less than the prices quoted by U.S. manufacturers, Bruce Allen, director of operations, says in the article.
However, Microtronic had to pay five percent to 10 percent more for shipping from Europe, Allen says in the article. Further, roughly every third delivery would have problems, such as the use of the wrong alloy or improper specification, which required Microtronic to stockpile inventory. If an issue wasn’t discovered until the afternoon, the company would lose a full day before it could even report the problem to the supplier, Allen says.
Today, Microtonic sources the part from a contract manufacturers in the U.S. at a higher price, but lead times and transportation costs are lower, the article explains. More importantly, Microtronic no longer loses valuable time waiting to follow up with suppliers several times zones away.
“You have to look at the broad picture,” Allen says. “The communication lag was a big factor.”
What are your thoughts on reshoring? Would a new “border-adjustment tax” have an impact on sourcing decisions?