China is losing some of its clout as an unstoppable manufacturing powerhouse. Rising labor and energy costs are forcing manufacturers to reconsider locating operations to even lower-cost-labor countries such as Vietnam and Indonesia. Some companies such as Apple and GE are moving production back to the United States. But how do you know when it is time to bring some of your manufacturing back? And what products should you manufacture in America?
Bringing manufacturing back isn’t as easy as you may think. There are a host of considerations and analyses that companies must perform to determine the costs and feasibility of reshoring. Several of the important factors in the original offshoring decisions have dramatically changed.
Through the use of new technologies and software and innovation, costs can be brought down to a reasonable level. Add in the reduction in global logistics costs and, suddenly, America looks pretty competitive.
Factors to Consider
- Cost Increases - These days, there is virtually no wholesaler, retailer, or OEM in the industrialized world that is not sourcing some, if not all, of its products from China. All supply chains seem to start, lead through, or finish in China. The advantages of low-cost production for export and a competitive and aggressive clustering of second- and third-tier suppliers, combined with the enormous potential of its internal fast-growing market, have created amazing opportunities in China. From “Made in Hong Kong” in the 1970s to “Made in Taiwan” or “Made in Singapore” in the 1980s to “Made in China,” the trend of outsourcing manufacturing has been relentless.
Outsourcing to other low-cost countries will continue only when there is a high labor content in production or high transportation and logistics costs due to weight or volume of your products. Once automation is added into the production equation, the cost picture dramatically changes. Through the use of new technologies and software and innovation, costs can be brought down to a reasonable level. Add in the reduction in global logistics costs and, suddenly, America looks pretty competitive.
- Innovation - The pace of innovation in new materials, increasingly sophisticated digital electronics, and manufacturing technology such as 3D printing has never been faster. To evaluate reshoring possibilities you should consider the current state of your global manufacturing as well as the opportunities for manufacturing innovation.
Federal and state governments have jumped on this bandwagon with incentives and programs to support reshoring. The tax and other financial incentives offered by state and local governments are particularly important to your analysis of the total financial picture.
First consider new projects and engineering improvements in the works. For example, are you implementing SAP or Oracle and will these systems provide new data or drive manufacturing efficiencies? What benefits will be derived from implementation in the U.S.?
Consider what new automation or manufacturing hardware could be added to your production environment. As long as you are considering a new manufacturing profile, why not consider the latest machines and shop floor layout? These considerations will add to your overall efficiency and keep your costs at the lowest point. Evaluate the newest and most interesting breakthroughs such as 3D printing, which may make sense for part of your manufacturing line. 3D printing is the way of the future and should be given careful consideration. New equipment may qualify for special tax incentives making the upgrade even more attractive.
Innovation will help you remain competitive and create the lasting benefits that help to sustain manufacturing capabilities in America.
Market Access and Localization - You should not look at your reshoring decision as a binary one. It is not a matter of manufacturing here vs. there, but rather a more strategic look at global manufacturing locations. Manufacturing close to customers allows companies to reduce lead times and keep up with the market’s constantly changing demands through localization and customization.
China is a rapidly emerging major market for U.S.-branded goods. The Chinese middle class alone comprises 350 million people and is growing rapidly. Other Asian nations are also developing rapidly, making Asia the largest growth market by far of any region in the world. These Asian current and future customers will be important to your company’s global sales. Your manufacturing strategy should take this market and others into consideration before you make location decisions. A multi-region manufacturing strategy is the most popular approach.
Gathering and analyzing market data and determining key trends is critical to manufacturing location and localization decisions, particularly for consumer products. For example, you may be manufacturing and selling mint-flavored toothpaste in the U.S., and tea-flavored toothpaste in Asia. Localization decisions related to culture and taste may be obvious, while other localization decisions are not. You may want to produce a low-end product for the developing Chinese market and a more sophisticated, precision product for the U.S. market. You should take into account your entire product line and the perception of quality for your products in the global marketplace before making such decisions.
- Skills - It is critical to your evaluation to determine which skills will be needed and where the workers will get training. Partnering with local community colleges is one way to solve this challenge.
You may have been managing engineering and development in the U.S., separated physically from manufacturing in China. Leverage the knowledge of these people first in order to define the skills requirements. You will also need to take into consideration your global organizational structure. Will product development and engineering continue to be located in the U.S. or is it time to consider a more global organization with vertical skills in every region?
- Political Environment and Public Sentiment - We know tide of public sentiment toward outsourcing has shifted as a result of the economic downturn and lingering unemployment. The federal and state governments have jumped on this bandwagon with incentives and programs to support reshoring. The tax and other financial incentives offered by state and local governments are particularly important to your analysis of the total financial picture.
To rebuild a strong America, we need to bring our manufacturing underpinnings back. To do so, consider all aspects of the decision and think strategically about the future.