Y’all Come Back Now, Hear?

Have you heard? American companies are reassessing whether offshoring the manufacturing of their products was such a good idea after all. The splashiest announcement regarding U.S. manufacturing came earlier this year when Wal-Mart, whose low prices have been dependent on offshoring, announced a plan to put $50 billion worth of American made goods on their shelves over the next decade. [1]

The ReShoring Initiative [2], is an industry-led advocacy group, headed by the energetic Harry Moser, with a goal of returning manufacturing jobs to the United States. Their website features a Total Cost of Ownership Estimator survey, to call attention to the fact that businesses who were making decisions on their production facilities based primarily on labor costs should consider many other factors as well.

The Economist, the British-based international journal of business and current affairs, reported last year on the experience of one American company called ET Water Systems. ET, located in California, and a manufacturer of irrigation systems for other businesses, joined the exodus to China in 2005 to lower its production costs. By 2010, however, the company’s chief executive had discovered that the cost savings on labor were largely devoured by the delay and price of shipping their products back to North America, lesser quality, and the ability to effectively communicate item design changes to the production force. ET eventually partnered with General Electronics Assembly back in the Golden State. [3] 

ET is certainly not alone in “reshoring” its manufacturing. The Economist also called attention to a 2012 survey by the Boston Consulting Group, in which 37% of manufacturers with annual sales over $1 billion, and 48% of those with sales over $10 billion, were actively considering or planning to return some production work to the United States. A more recent study by the Hackett Group, which advises companies on offshoring decisions, expects the rate of reshoring to double over the next couple of years. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.

To be sure, manufacturers opening new facilities in the U.S. are not doing so out of patriotism, but because of a variety of factors. The biggest and most critical reason that firms are coming back is that labor costs in China and other Southeast Asian countries aren’t as cheap as they once were. In China, factory workers’ pay and benefits rose an average 10% per year during the period of 2005-2010. As the lot has improved for Chinese laborers, they have in turn used their new found power to demand action on their grievances, such as shorter hours, better conditions, and more job security. In one memorable example, Honda, after a strike in 2010, gave its Chinese workers a 47% raise.

Although manufacturers could move on to other countries with lower pay, they often encounter nations that might not have the infrastructure, supply chain, or workforce delivering the quality that the Chinese market has. The Chinese government’s authoritarian atmosphere has also been beneficial to foreign manufacturers and multi-nationals in quashing economic and political risks. Contrast that with a country like Mexico, which may be attractive to production work given its lower-paid labor force and proximity to many American markets, but also has a major dilemma due to its violent war between narcotics cartels and the beleaguered government. Another “game changer” in favor of reshoring has been the natural gas boom which has dramatically changed the U.S. energy paradigm. Having lower cost, domestically produced oil makes manufacturing an attractive option in the battle over the bottom line.

The irony of the situation is that American workers are now being looked at favorably because their emerging-world counterparts have equaled or even eclipsed them. The Economist related the findings of the consulting firm Hay Group, that, aside from even assembly-line laborers, “(p)ay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe….” According to the United Nations’ International Labour Organization, real wages in Asia had indeed risen by an average of 7.1% - 7.8% per year between the years 2000 and 2008, whereas advanced economies had gains of a mere 0.5% - 0.9% during the same period. In fact, Americans in the manufacturing sector actually had their wages drop, not advance, by 2.2% since 2005.

Americans in the bottom rung of the economic ladder shouldn’t hold their breath on seeing a raise in the Federal minimum wage guidelines. But in China the average factory worker’s pay rose by 19% per year from the years 2005 to 2010. Directives from Beijing expect the minimum wage increase to top 13% per year for the next couple of years.

The moribund state of U.S. manufacturing has meant that companies looking to open or expand production facilities are finding a more pliable, and, in some areas, desperate pool of workers. With stagnant wages, and with secure benefits a thing of the past for many workers, the companies hold the better hand. When large manufacturers like Boeing, Airbus, BMW, and Volkswagen have taken on new workers in America it has generally been in so-called “right to work” states, where employees are under no obligation to join a union. Even where unions have had a legacy of protecting the rights of workers, fears of plant closings have pushed organizations like the United Auto Workers to agree, as it did in 2007, to lower compensation from the Big Three domestic auto makers for newly hired workers, thus, in one fell swoop, ending worker solidarity, by creating two tiers of employees, while still not necessarily ensuring long-term job security. Also, many of the companies that may return some manufacturing to the U.S. are multi-national concerns that may still have workforces spread throughout the globe, even with a meaningful return to American soil. For instance, Caterpillar received much praise for opening a new plant in Texas to build excavators. They also continue to expand efforts in China, since there are still major infrastructure and construction projects in that sales market that may be lacking in the United States.

One real opportunity for growth and good-paying, secure jobs in the U.S. production sector will be to expand and support advanced, precision, and high-tech manufacturing through collaborative investment by industry, various layers of government, vocational schools, and union apprenticeship programs. With the Asian workforce’s advancement in wages, it will come down to skills and productivity. The nation that invests in keeping its workforce and facilities up-to-date will have the inside track.

The Alliance for American Manufacturing, a group comprised of leading domestic producers and the United Steelworkers, have been advocating for a coordinated national strategy on manufacturing, which would include addressing grievances with the Chinese government on deceptive and unfair trade policies, public investment in infrastructure, and “Buy American” requirements. The key elements of their plan are listed  here.

Do you think that a top-down approach wouldn’t work? That view would surprise Alexander Hamilton who advocated for a national industrial policy as early as 1791, in an era of miniscule of Federal government. [4] Through World War II, the Federal government supported the growth of manufacturing, until the philosophy that government should have no involvement in advancing the private sector on a national basis became predominant.

Germany could provide an excellent example for the U.S. in this regard. Since the 1990s, the German government has collaborated with industry and unions to forge a strategy that benefits all interests. German manufacturers contend with more regulation, muscular unions, and “green” benchmarks than their U.S. counterparts do, and yet they have not had a trade deficit in decades. In 2012 they racked up a budget surplus. Their financial institutions remain strong enough that they became the effective lender of last resort when the economies of a number of European Union members fell apart during the Great Recession. How do they do manage it? The Berlin government invests directly in production companies, has revamped its educational system to lead youth toward apprenticeship and trade programs, and, through scientific and technological grants, helps anticipate new manufacturing trends and innovations. Small and mid-sized German firms with less opportunity to raise capital from private investors have easier access to loans from municipal banks. What is also key is that German production workers are paid well, insuring a strong middle class, who can use their economic ability to spend on other non-manufacturing aspects of the economy. Also, the German government holds direct talks with unions to try to solve workplace concerns, and identify cost savings that won’t kill jobs. [5]  

Imagine a Congress that invested in American manufacturing. Imagine further a formalized body that could empower the Small Business Administration, National Labor Relations Board, leading producers, vocational training programs, and similar stakeholders to develop a policy to keep good jobs, training, and innovation strong in the United States for years to come.

Kirk G. Morrison

Kirk Morrison is chairman of the National Committee of the American Solidarity Party.

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