For the first time in the history of EDS (Electronic Distribution Show), industry associations ECIA (Electronic Components Industry Association) and ERA (Electronic Representatives Association) joined forces at the Cosmopolitan Hotel in Las Vegas, NV on May 8, 2013 and offered a co-sponsored early morning breakfast for attendees in preparation for a second full day of meetings between distributors and manufacturers.
The morning’s entertainment came in the form of keynote speaker, Dennis Young, Executive Vice President of Business Development and Marketing, Sanmina-SCI, who gave a presentation on reshoring, the new buzzword representing the return of manufacturing to North America.
In the press, “reshoring” is defined as the repatriation of manufacturing operations from a low-cost country, back to the home country. In Washington, it stands as the repatriation of manufacturing operations from China, back to the U.S. But in reality, according to Young, it is the transfer of “some manufacturing production from a low-cost country back to the home country or to another country, low-cost or not.”
Several factors come into play when manufacturers make the decision to move or reshore (see chart). The wage gap is never the only reason, but in all cases, the move makes business sense – it’s not simply a feel good story.
While reshoring has found its way into a lot of headlines, Young says that it is primarily a U.S. phenomenon. In Europe, many companies are family owned and have a natural allegiance to the home country, even though the workforce is inflexible and costly, the labor laws are very restrictive, and it remains difficult and expensive to lay people off.
So, why reshore? According to Young, manufacturing wages are rising in China, up anywhere from 15% to 20%, with minimum wage set to rise at least 13% a year for the next five years. As transportation costs rise, companies have benefitted from regionalization, closing the gap between manufacturing and end market.
From “Outsourcing & Offshoring,” in the January 2013 issue of The Economist, “As the gap in worldwide wage rates narrows further, it will become more obvious that other factors, such as skills, labor law, clusters of industries, infrastructure, tax, and regulation are playing an ever more important role when companies decide where to put their production.”
“As labor costs in China have gone up, their competitive advantage has slipped,” Young said. “As time goes on, you’ll see more parity in labor rate and landed cost benefit … As manufacturing costs increase in all of Asia, provided labor costs in the U.S. do not go up, we’ll see companies become more serious about reshoring to the U.S.”
From the Wall Street Journal, April 2013, “The idea that American manufacturing is on the cusp of a renaissance is everywhere these days – except the hard numbers.” According to The Economist, the number of firms known to have reshored manufacturing to America is well under 100. And The Hackett Group, in May 2012, suggested that “the continued outflow of capacity from advanced economies will more than offset any capacity being reshored.”
“It’s not always easy to come back to the U.S.,” Young said. “It has to do with the supply chain. The supply chain that has been established in China is second to none, and not all components are available in the U.S. today … Regionalization is the real trend.”
Manufacturers are building products to specifically serve local markets, and this strategy, according to Young, could have the biggest potential impact in the U.S. – corporations building plants to make products that serve the U.S. market, to serve the U.S. market.
“Texas and the Midwest will be the benefactors of ‘regionalization’ more than anywhere else,” Young said. He also stressed that U.S. productivity is significantly higher than other countries. Currently, developing nations employ three people to do the same job as one person in the U.S.; however the wage discrepancy is still weighed heavily in the favor of developing countries.