The Trend Towards U.S. Manufacturing

The New York Times article Is Manufacturing Coming Back to the U.S.? discusses the increasing and hidden costs of manufacturing in China, resulting in manufacturing in the U.S. becoming more cost effective.

Chinese manufacturing costs are going up due to rising labor costs, increasing transportation costs and the Chinese government decision to allow their currency to fluctuate - a decision that will very likely lead to the Yuan appreciating against the dollar.

The article also points out that in addition to rising costs, there are also cash flow disadvantages associated with the use of Chinese manufacturers. 

We first noticed companies starting to shift manufacturing back to the U.S. several years ago.  The companies moving manufacturing back to the U.S. at that time were firms that made products with high transportation costs relative to the value of product, and/or products with relatively small production runs.

Back then we were unsure about the strength and breadth of this trend - called "near-sourcing" in the NY Times articles but is also referred to as "insourcing," "boomeranging" and even "farmshoring."

Since we first noticed this shift we've become much more confident that the trend is real, and we expect many more companies will choose to manufacture in the U.S. in the coming decade.  The key drivers include:

1.  The increasing and hidden costs of off-shore manufacturing.  These are described in the NY Times article. 

2.  Increases in shipping costs over the next decade.  The NY Times article covers the recent steep increase in shipping container costs, but longer term costs will likely rise even more.  Due to growing developing world demand, energy prices will continue to increase and demand for shipping will outpace supply. 

3.  A growing emphasis on cutting CO2 emissions.  This will result in companies looking for shorter supply chains.  Likely taxes on CO2 emissions will also make long distance shipping more expensive.

4.  Automation and productivity gains by U.S. manufacturers.  Increased automation and productivity gains reduce the wage advantages of manufacturing abroad. 

5.  The growth of niche and customized products, resulting in shorter production runs for a growing range of manufactured products.  Shorter production runs reduce the cost advantages of manufacturing overseas. 

6.  Customer and political pressure.  Former Intel CEO Andy Grove's Business Week cover story How America Can Create Jobs is a good example of changing attitudes around U.S. manufacturing.  He is calling for a pro-U.S. manufacturing industrial policy.  We expect more pressure from government and customers to manufacture in the U.S. 

It is important to point out that while we believe the U.S. is becoming more competitive in manufacturing and some manufacturing will move back to the U.S., most won't.  Mass produced products with long production runs will still be manufactured in lower cost countries. 

Comments

[Anthony Hopkins]

Chinese manufacturing costs are going up due to rising labor costs, increasing transportation costs and the Chinese government decision to allow their currency to fluctuate - a decision that will very likely lead to the Yuan appreciating against the dollar.

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To see a shift away from China in relation to manufacturing would be no bad thing..some of the working conditions,health and safety etc. are ridiculous.

[Mel L., MBA]

It would be great to have more manufacturing done in the United States. This would mean more domestic jobs and a good catalyst for economic recovery.

[Jordan Shoes]

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[Powder Coating Equipment]

The number of factors should be taken into consideration like Return of Manufacturing, Energy Cost Impact on Manufacturing/ Supply Chain,Trends & Drivers for Return of manufacturing.The global economy can be beneficial if they stay flexible.Manufacturing trends impacted output growth slowly despite negative input growth.

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[PhitchOC]

For too long today's ERP packages have been using outdated decision models developed in 1913 that make it difficult to determine which source of supply is best financially. That is why we developed Phitch - which treat inventory as an investment - in doing so businesses are much more able to weigh to complex decisions with a global supply chain. While all this sounds complex - the best part is that we make it easy - simple color coded business alerts that tell the user what is best. Our software supports this trend not because that is what the herd is doing but it often is the best financially.

[Daniel Townsend]

It all comes down to designing products that people want. There's no point making a product cheaply in China that nobody wants. By being close to customers, US manufacturers should use the opportunity to really understand what the needs of the customer are. That is the route to value and successful domestic manufacturing.

[Todd Hockenberry]

Great article and post...we have been advising our small manufacturing clients to take advantage of the increasing costs of exporting manufacturing by:

1. Focusing on a specific product/technology niche and building a virtual team with the rest of the expertise needed to succeed - eg. hire IT service firms, marketing experts, financial gurus instead of bringing all functions in house.
2. Leveraging online technology to get found by potential customers.
3. Reducing friction for local/regional customers in terms of delivery, billing, service, warranty, etc...
4. Adding value to their manufactured goods by bundling a service with the product, eg. deliver goods in point of sale packaging eliminating a step for the buyer.
5. Partner and network with larger sales and marketing networks and earn referrals

Great to hear people being more optimistic about US manufacturing....we still have a lot of talent and expertise in this country and we certainly need the jobs these companies provide.

[Terry]

To see a shift away from China in relation to manufacturing would be no bad thing..some of the working conditions,health and safety etc. are ridiculous.