In increasing numbers, American companies are reconsidering the benefits of offshoring their production from the United States to other countries. While low labor costs have long been one reason for producing goods overseas, U.S. executives have begun to complain that unforeseen other costs make foreign manufacturing a bad deal. "Fifty percent of original equipment manufacturers find no financial benefit in offshoring," according to Harry Moser, founder of the Reshoring Manufacturing Initiative, which helps companies calculate the actual cost of offshoring and then bring production operations back home. "Sixty percent of manufacturers apply only rudimentary total cost models," Moser says. "They ignore twenty percent of total costs when they offshore, and the missed costs go to overhead, like travel, to the balance sheet, and to opportunity costs when they can't deliver because the pipeline is too long." Among other things, shorter supply chains mean less risk, from rising energy costs to counterfeiting to earthquakes and flu epidemics.
Even the benefit of cheap foreign labor is diminishing. According to a recent Boston Consulting Group study, Chinese factory-worker pay increased 69 percent between 2005 and 2010. And those wages are likely to continue growing at a rate of 17 percent per year through 2015, according to the study. This would all but eliminate the labor cost advantage of Chinese production, which is further eroded by the weakening U.S. Dollar and the gradual appreciation of the Yuan in recent years from 8.3 to 6.5 to the dollar.
These trends have not gone unnoticed by U.S. companies. Last year, General Electric announced it would move production of its new energy-efficient water heaters from China to the United States. Caterpillar announced plans to expand domestic operations with a 600,000 square foot hydraulic excavator factory in Victoria, Texas. Wham-O also brought half of its Hula Hoop and Frisbee manufacturing back from China to California in 2010. An ATM manufacturer, NCR Corporation, decided in late 2009 to bring production back to Columbus, Georgia.
Could this be the beginning of a real American manufacturing renaissance?