29 Apr /14

Turning the Tide

manufacturing insourcing USAFor well over 2 decades, media and news outlets have been inundated with stories of outsourcing. Sad as they all are, the stories, for the most part, read the same: local manufacturing facility is leaving the area and opening a new facility in a developing country to cut costs. During the height of the outsourcing media hype a lot of attention was paid to the doom-mongers who forecasted the death of manufacturing in the developed world. Unfortunately, very little screen time was granted to economists who suggested differently. As a result of this unbalanced portrayal, the recent resurgence of manufacturing in the developed world, notably the United States, has gone largely unnoticed by the general public. While we have become quite familiar with terms such “outsourcing,” “relocation” and “offshoring,” most Americans are unfamiliar with terms such as “insourcing,” “reshoring,” and “nearshoring.” This is, however, bound to change as more and more manufacturers choose proximity to markets over cheap transportation cost and skilled workers over dumping wages.

Initially, manufacturers left the United States for Asia and Latin Americas as a direct response to three core issues: labor costs, transportation costs, and workplace regulation and legislation. As late as 2005, labor costs in China were about 25% of wages in the United States, with the added benefit of a favorable currency exchange rate (in 2005, the Renminbi was worth 75% of today’s value). In addition, fuel prices, and therefore transportation costs in general, ranged from $2.10 to $3.00 per gallon thereby adding to the competitive advantage of offshore production over domestic manufacturing.

Why then are companies looking to manufacture in America again, what has changed in the last ten years? For other countries, such as Germany, Japan, and the UK, US manufacturing is increasingly offering a cost-effective alternative. Labor costs are still cheaper than in Europe and the North American energy boom has helped to reduce transportation costs within the U.S. More importantly, however, the U.S. market has shown itself to bounce back from the recession much quicker than its European and Asian counterparts. Producing in the United States today means to produce in the most diverse and stable of the big domestic markets.
While European and Asian companies are increasingly producing their goods in the U.S., the greatest influx of new manufacturing in the US is, surprisingly, originated by companies that were previously outsourcing to the developing nations of Asia and Latin America. As labor costs in developing countries have increased and internal need as well as external pressure have teamed up to increase the amount of workplace oversight and regulation, the advantages of offshoring are diminishing. When combined with the natural advantages of the United States, namely a strong and diverse market, efficient transportation infrastructure, effective supply chain management, skilled labor force, and predictable health and safety oversight, the resurgence in U.S. manufacturing is a logical step in a changing global environment.

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