Over the course of the last few years, the American manufacturing industry has been making a slow, but steady, comeback. Meanwhile, China has been starting to stumble a bit as its growth declines despite deeply cut interest rates and a savagely devalued national currency.
A recent Harvard Business Review article by MIT professor David Simchi-Levi titled “You Can’t Understand China’s Slowdown Without Understanding Supply Chains” highlights some of the reasons why American manufacturing is growing while China’s growth is beginning to slow.
Some businesses are starting to move their manufacturing capacity from foreign locations such as China to American shores. Much of America’s recent manufacturing growth can be attributed to this practice of re-shoring.
Re-Shoring and American Manufacturing
Simchi-Levi’s findings are based largely on an MIT report called “U.S. Re-Shoring: A Turning Point,” which studied 156 U.S.-based companies’ attitudes towards the concept of re-shoring their manufacturing capacity (and jobs) to the U.S.A.
According to the MIT report, “33.6% of respondents stated that they are ‘considering’ bringing manufacturing back to the U.S., while only 15.3 % of U.S. companies stated that they are ‘definitively’ planning to re-shore activities.” This means that 48.9% of the companies surveyed were either planning to re-shore or were seriously considering it.
Does that mean that the other 51.1% had no plans to re-shore manufacturing? Not necessarily. As stated in the survey, “one-third of the respondents did not answer this question.” These companies either could be planning to re-shore, or they might not be, the data is effectively missing.
The real question is, “why are American companies re-shoring their production capacity to the U.S.?”
Simchi-Levi, in his article, lays out four strong reasons for companies to move their production back to the U.S.:
Reason #1: Labor Costs
Decades ago, China was considered the “go-to” location for outsourced labor, primarily because labor costs were incredibly cheap. Chinese workers would work for pennies on the dollar compared to American laborers, and many companies couldn’t resist the allure of cheap labor.
However, in recent years, the wage gap between U.S. workers and Chinese laborers has shrunk. According to a statistic cited by Simchi-Levi, “in the last few years, labor costs in China have increased annually by almost 20% versus 3% in the United States.” This increase in labor costs eliminates one of the primary advantages that Chinese manufacturing once had over American manufacturing.
Reason #2: Automation/Productivity
American manufacturing plants have heavily invested in automation over the last few decades. Using manufacturing robots to bend, weld, cut and shape steel has massively improved productivity for American factories.
How much of a difference has factory automation made for productivity? As cited in a CBS news report, “Each U.S. worker produces $63,885 of wealth per year,” while “a Chinese industrial worker produces $12,642 worth out output.” On average, this means an American worker was at least five times as productive as his Chinese counterpart.
Not only does manufacturing automation allow American workers to complete tasks faster, such automation also reduces parts rejections and safety incidents when used correctly. Since integrating factory automation such as wire bending robots and welding machines, Marlin Steel has gone over 2,500 days without a lost time safety incident.
This allows American manufacturing plants to turn out higher-quality parts faster and more consistently than their Chinese counterparts, getting more product finished with less labor spent.
Reason #3: Energy Costs
The shale gas boom of the last year has been a big shot in the arm for American manufacturing. One of the largest costs that manufacturers face (beyond labor) is the energy bill, particularly for manufacturers who rely on heavy equipment.
The abundant availability of cheap energy in the U.S. has made it easier for companies to operate on American shores.
Fracking of natural gas also makes it cheaper to manufacture components that require oil (such as many plastics), because oil is more readily available and less costly.
Reason #4: Supply Chain Risk
There are many risks attached to any manufacturing venture, but there are supply chain risks that are made worse when outsourcing production to a foreign country such as China.
One example highlighted in Simchi-Levi’s article is that outsourcing and offshoring production increases risk for a company “because their supply chain is geographically more diverse and, as a result, exposed to all sorts of potential problems.”
Long supply chains that pass through multiple countries expose each shipment to extra customs delays and risks of shipment loss at checkpoints. These delays make it harder to fulfill orders in a timely manner, and could lead to lost sales.
Between labor costs, productivity, energy costs, and the supply chain, there are many reasons for a company that is making goods for the American market to re-shore their production to America.