However, in 2008, Investment Consulting Associates (ICA) challenged this widespread view by positing that the United States could be re-invented by investors as a favorable location for manufacturing processes and outsourcing activities. By means of our research study - presented at the IEDC 2011 annual event in Charlotte, North Carolina - ICA justified and validated our statements to a wider audience. The presence of a large internal market, highly educated employees, strategic infrastructure, and relatively decreasing international labor costs point toward a newly emerging trend in foreign direct investment, i.e., the revival of the United States as an economic powerhouse.
U.S. Global Competitiveness
The competitiveness of the United States versus emerging and low-cost markets has been assessed by a fact-based benchmark analysis using objective data from international organizations and national statistics sources. The criteria used in the competitiveness benchmark are comprised of:
- Business environment
- Labor costs
- Business risks
- Macro economy
The web-based benchmarking tool LocationSelector.com transforms the actual country values into a relative score between 10 and 100 (e.g., best-in-class country for a particular factor receives a relative score of 100) and calculates the overall country competitiveness scores.
The overall competitiveness ranking implies that the United States still offers a very competitive investment location compared to the selected emerging low-cost and high-growth markets. The United States consistently scores well in terms of business environment, business risks, infrastructure, and tax.
Needless to say, in terms of labor costs, the United States has a distinct cost disadvantage compared to its competitors. Yet, a new trend called "re-shoring" has been observed. Re-shoring involves re-migration of business activities back to the United States from overseas locations, as illustrated by Ford Motor Company and Wham-O (the makers of the Frisbee®), which have brought their overseas production back to the states. Also Presair, a manufacturer located north of New York City, is returning production of switches to the United States from China. Presair's reasons for moving production back to the states include the desire to cut long lead times for product and to free up capital that would have been needed for expansion in China.
Total Cost of Ownership (TCO)
In addition to a fact-based global competitiveness benchmark and real life examples from the corporate markets, ICA's research simulated a manufacturing business case located in the United States and in China.
Any financially based case analysis of the impact of offshoring manufacturing activities must take into account all the costs associated with an offshore initiative. In practice, corporate decision-makers often ignore important cost drivers and focus only on the labor cost differential between the United States and emerging economies such as China, i.e., a labor cost of US$2.80 per hour in China versus US$25 per hour in the United States. However, the manufacturing business case simulation highlights the hidden costs of relocating overseas and illustrates that the so-called Total Cost of Ownership (TCO) actually favors the United States as an investment location over China.
The Total Cost of Ownership approach (TCO) - based on the TCO model provided by Reshoringmfg.com
- analyzes the entire cost a company incurs when producing or purchasing a particular manufactured part overseas and consists of the following key components:
Let's look at an example:
- Raw material costs
- Packaging costs
- Transportation costs
- Customs and duties fees
- Inventory costs
- Lead times and local warehousing costs
- Quality control costs
- Travel costs
- Training and productivity
- IP risks
- Exchange rate fluctuations
- Inflation rates
Company XYZ is active in the automotive industry and is a first-tier supplier to original equipment manufacturers (OEMs). It produces high-technology braking and gearing systems, for which it also uses its own software systems, fully integrated with its "hardware" products. For its supplies of specific steel products, XYZ is depending on several suppliers that are located globally. The board of directors is following a vertical integration strategy to allow for further growth of the company. The board must decide whether to source the steel from third parties or produce and process the steel for the company's products internally. Secondly, it must decide where to locate such a steel processing plant. Would it be more beneficial to locate the steel plant overseas and potentially benefit from lower cost levels, or does it make more sense to keep it close to the other U.S. facilities to minimize lead times and transport costs?