“If you’re a manufacturer, you need to be reevaluating your costs,” warned CIRAS program manager Mike O’Donnell. “Because other people are doing that and bringing certain work back.”
An analysis of economic data and national reshoring trends by CIRAS project manager Marc Schneider and postdoctoral research assistant Ranojoy Basu shows that rising overseas labor prices have shifted the math in certain manufacturing industries. Factory work that used to be cheaper outside the United States now might not be once you also consider costs such as transportation, energy, currency fluctuations and potential quality issues, among other things.
“In the past, people primarily decided whether to offshore or onshore based on how much the labor cost was or the price they got from the supplier,” Schneider said. “Now, manufacturers are smarter and have had more experience and have seen that there are other factors.”
A 2013 report by The Boston Consulting Group estimated that U.S. manufacturers “will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade.” The report estimated that growth in U.S. exports, combined with production reshored from China, could create 2.5 million to 5 million American factory jobs by 2020.
According to the Boston Consulting analysis, much overseas manufacturing has involved products such as clothing, textiles and other items that require extensive labor inputs but cost relatively little to find and transport necessary materials. Consultants view that work as unlikely to return to the U.S. Meanwhile, production for products with low labor inputs and high logistics costs – such as food, petroleum, wood, paper, glass and stone – has never left.
Experts say the stuff in the middle – products with moderate logistics and labor costs – might or might not be ripe for a return.
CIRAS experts advise Iowa manufacturers in the machinery, furniture, and plastics and rubber industries to pay special attention, because Iowa has a relative specialty in these industries and they’re in this middle ground. In addition, Iowa manufacturers purchase disproportionally high volumes of fabricated metals from low-cost countries. Supply chain leaders could find potential cost savings by reshoring.
“There are certain industries that we have a high specialization in – that means Iowa companies know how to do this better than other people in the U.S. – and they’re tipping-point industries,” O’Donnell said. “That means we need to be going out and trying to win that business.”
For more information about reshoring for help in analyzing the factors involved in it, contact Marc Schneider at maschn@iastate.edu or (515) 221-1596. The full white paper can be found here.