Will North America Be the Next Outsourcing Destination for Manufacturing?

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Dongguan Win Win Industrial, a Chinese shoe factory that makes high-quality shoes for large American chains, is looking to the U.S to source its manufacturing. Wall Street journal writer Andrew Brown wrote about the story on Tuesday as the growing trend of nearshoring for outsourcing solutions develops.

The case Brown looks at isn’t isolated. Other Chinese manufacturers have also built factories in the U.S. In November of last year, clothing manufacturer Tianyuan Garments Co. acquired a metal fabrications plant in Arkansas. Even Hasbro Inc. has decided to source from the U.S. Play-Doh products are again being manufactured locally; something that hasn’t happened since 2004.

Over the last decade, an increasing number of manufacturing jobs having been returning from abroad back to North America. While the political climate plays a part, other factors are driving the change.

Looking at the Numbers

To say that offshoring producer jobs has been popular over the last few decades, would be an understatement. Just between 2000 to 2003, around 220,000 American jobs were shipped overseas annually according to the Reshoring Initiative.

2014 was a turning point. For the first time in over 20 years, there was a net gain of 10,000 jobs brought back to American shores. Combine that with the fact in 2016 alone, Chinese companies invested over $20 billion into the U.S. That figure was practically non-existent just a decade earlier.

The trend is set to continue. The 2016 Global Manufacturing Competitiveness Index predicts that the U.S will be the most competitive manufacturing economy in the world by 2020.

Factors Contributing to Reshoring

There are several contributing factors that is changing global supply-chain economics:

Rising Wages in China

Rising labour costs in China shouldn’t come as a surprise, especially with some years seeing a 15%-20% annual increase.

“In 2004, the cost of manufacturing on the east coast of China was approximately 15 percentage points cheaper, on average, than in the United States. In 2016, that gap was down to about 1 percentage point” report Justin Rose and Martine Reeves in this Harvard Business Review article.

Automation Technology

The rise in robotics technology has led to greater automation of tasks, further reducing the cost advantage of offshoring. It’s estimated that up to 50% of the work done in a plant today could be replaced through robotics technology.

Changing Customer Expectations

We’re now in the age of e-commerce. Industry giants such as Amazon are already cutting deep into their profit margins to keep up with competitors. The only advantage left is speed. Customers want their items arriving the same day or even hour as when they order. This means it’s becoming more practical for items to be manufactured in-country rather than ship it overseas.

It’s too early to say how the growing trend of nearshoring will affect the American job market. Companies like Walmart have already pledged themselves to investing in more local sources. However, that doesn’t mean all the jobs lost will be returning. Customer expectations are pushing supply chains toward greater automation at home, not necessarily more jobs. What is certain, is that as global supply chains grow in complexity and cost, more companies will be looking closer to home to manufacture their items.

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