The U.S. economy in 2013 should get a badly needed push from the acceleration of an improbable trend – the return of offshored manufacturing jobs to America.
Often referred to as reshoring, the trend started to gain traction this year, but is attracting more and more interest from manufacturers who just a decade ago couldn't move production to China and other foreign countries fast enough.
Companies rushed to send work abroad to take advantage of cheaper labor costs as well as to have factories closer to customers in rapidly expanding Asian economies.
Some companies did improve their bottom line, but at a great cost to the U.S. economy: America lost nearly 6 million manufacturing jobs between 2000 and 2010.
Yet calculations that favored the offshoring of manufacturing just a few years ago no longer add up. Some argue they never did, as offshoring turned out to have many hidden, unforeseen costs for many companies.
"There was a herd mentality to the offshoring," John Shook, a manufacturing expert and the CEO of the Lean Enterprise Institute, told The Atlantic. "But it was also the inability to see the total costs – the engineers in the U.S. and factory managers in China who can't talk to each other; the management hours and money flying to Asia to find out why the quality they wanted wasn't being delivered. The cost of all that is huge."
Now jobs once thought lost forever are starting to return to the U.S.
According to a Boston Consulting Group survey taken in February, 37% of U.S. companies with sales of $1 billion or more are either planning on reshoring some production or actively considering it.
Why Companies are Reshoring
Reshoring already has reversed the long, steady decline of manufacturing jobs in the U.S. Since 2010 America has added 500,000 manufacturing jobs, an increase of 4.3%.
With the disadvantages to manufacturing overseas growing each year, it's no wonder reshoring is becoming popular:
- Transportation Costs: Oil prices have risen three-fold since 2000, which has raised shipping costs;
- Cheap Natural Gas: Meanwhile, the natural gas boom in the U.S. has reduced the energy costs of operating a domestic factory;
- Decline of the Dollar: The U.S. dollar has fallen 30% since 2000, which has made U.S. labor relatively cheaper;
- Shipping Time: It takes about a month to get a product made in China back to the U.S., which slows the arrival of product updates to market;
- American Ingenuity: Building products in the U.S. allows companies to experiment far more easily with both manufacturing and product design improvements.
Several of these issues were true even a decade ago, but were overlooked in the rush for cheap labor.
"The way we see it, about 60% of the companies that offshored manufacturing didn't really do the math," Harry Moser, a retired MIT-trained engineer, told The Atlantic. Moser said about 25% of products being made elsewhere could be made in America for less.
How Reshoring Will Help U.S. Economy 2013
As more jobs return to the U.S., they will bring a host of benefits to the U.S. economy and its workers.
For example, according to a research report by the Boston Company released in May, every manufacturing job that's brought home adds one to two jobs in other industries. This so-called "multiplier effect" occurs when support industries add workers to keep with increased business.
What's more, a rise in manufacturing jobs should boost average wages in the U.S. because factory jobs generally pay more than do the kind of service jobs otherwise available to low- to medium-skilled workers.
This is still true even though the wages for reshored jobs are usually lower than what manufacturing workers in the U.S. traditionally have earned.
According to the U.S. Bureau of Labor Statistics, the median wage for production occupations in 2011 was $14.74 an hour, compared to $9.09 for food preparation jobs and $11.94 for sales-related occupations.
But manufacturing wages have fallen to the point that, along with some other factors, the U.S. is again competitive in the world labor market.
"The U.S. has held manufacturing wages in check while there has been strong wage growth in China and moderate wage growth in Mexico," economist Gordon Hanson of the University of California, San Diego, told The Wall Street Journal.
Wages in Chinese factories, about $3.40 to $3.50 an hour, are still far below those in the U.S., but they are five times what they were in 2000.
And when you consider that U.S. worker productivity is about triple that of Chinese workers, the difference is negligible; the small remaining advantage doesn't come close to making up for the other costs of offshoring.
The Companies Reshoring Now
Reshoring doesn't make sense for every industry (shoes and clothing, for instance), but is proving smart for companies that make heavy or bulky items, such as heavy machinery, appliances and furniture, as well as those who make highly customizable products.
And Apple Inc. (Nasdaq: AAPL) CEO Tim Cook recently announced plans to start building some of its Mac computers in the U.S. in 2013.
GE reinvigorated its mostly dormant Appliance Park in Louisville, KY, over the past couple of years, adding assembly lines for water heaters and refrigerators, with a dishwasher line set to start up next year. The workforce there has expanded 90% since last year from a low of 1,863 to 3,600 hourly employees.
GE CEO Jeffrey Immelt is clearly sold on reshoring, calling attempts to outsource production to low-cost labor countries as "yesterday's playbook" at a public event in September.
Immelt said he had invested $800 million so far to renovate Appliance Park, with more to come in 2013.
"I don't do that because I run a charity," Immelt said. "I do that because I think we can do it here and make more money."
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