Back in America: Is "Reshoring" Overblown?

♠ Posted by Emmanuel in at 12/30/2012 07:22:00 AM
There's an interesting feature over at The Atlantic on how more American manufacturers are moving back to the United States since expected savings from moving more production to the likes of China didn't materialize. To be sure, the world economy has also changed since the offshore fad peaked (see this earlier post on why offshoring and outsourcing are not synonymous--and why the article should have been entitled the "reshoring boom" instead of the "insourcing boom" to be more accurate). How has the world changed? They given the following bullet points:
  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
  • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
  • American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
  • U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
These are all to an extent true--especially the one about the excesses of American organized labour being reined in. Moreover, as the article does state, there isn't much logic in sending production half a world away if you're mainly just going to service the US market. (Mexico makes more sense for that, though the hardest core reshoring fanatic would consider going across the Southern border a step too far unless you are again using the land of El Tricolor for an entry to point to increasingly lucrative Latin American markets.)

At any rate, (American) firms thinking of moving to China at this point--you're kinda late, buddy--can play around with the "Total Cost of Ownership Estimator" provided by Harry Moser's Reshoring Initiative. While I would naturally suspect the output is skewed towards staying bank in the US of A, freight information and whatnot are readily obtainable for those actually making this kind of decision. You also have to factor in cultural, linguistic and time zone issues--although these kinds of transaction costs are not readily computable I believe. Anyway, Moser is mentioned in the article as one of the champions of this movement in the article, and the calculator provides...
Most companies make sourcing decisions based on price alone, resulting in a 20 to 30 percent miscalculation of actual offshoring costs. With the Total Cost of Ownership Estimator, users account for all relevant factors when determining their total cost of ownership including overhead, balance sheet, corporate strategy and other external and internal business costs.

Once your unique data is input into the calculator, you will receive your total cost of ownership analysis complete with:
  • Calculations of each source’s cost
  • An accumulation of all costs into cost categories
  • A grand total cost
  • Line charts showing each source’s current price, total cost of ownership and 5-year forecast
  • Line charts showing your cumulative cost by category
Have a look and see. Me? I am generally agnostic about location as a sometime consumer as long as the product is of good quality and is readily accessible when needed, so more power to those who "reshore" if improves either or both for American consumers. Still, the emphasis here is probably too Amerocentric for truly multinational firms that are neither American nor serve a largely continental US market.