Above: Boeing rolled out its first 787-9 Dreamliner in South Carolina last fall. The company will open a 9-story paint facility next year that requires thousands of tons of structural steel.

By measuring costs wisely, manufacturers discover the U.S. is a competitive place to thrive

September 2015 - Due to its increasing competitiveness in manufacturing, the United States will capture at least $70 billion in exports from other nations by 2020, Boston Consulting Group (BCG) predicted in a forward-looking 2013 study suggesting companies rethink their global footprint.

This competitive position is spurred by comparatively low oil, natural gas and electricity prices, high productivity, supply chain cost savings, and economic incentives from state and local tax bodies. Not only that, labor costs in China and elsewhere have risen.

The consulting firm estimated average manufacturing costs in the United Kingdom would be 8 percent higher than in the U.S. this year; 10 percent higher in Japan, 16 percent higher in Germany and France, and 18 percent higher in Italy. 

Three-quarters of global manufactured exports are concentrated in seven industrial categories (primary metals being No. 7 and worth $880 billion in 2011 dollars), BCG calculated based on data from the Organisation for Cooperation and Economic Development.

Thus, the case for reshoring manufacturing capacity and jobs that were shipped abroad over the past 20-plus years is clear. Anecdotal evidence of the trend—along with a healthy dose of increased foreign direct investment in the U.S. since 2009—is also persuasive.

Giant multinationals are among the persuaded. Toyota, Honda, Hyundai and Kia are among the transplant automakers now exporting U.S.-built vehicles; BMW, Mercedes-Benz and Volkswagen built assembly plants here.

Toulouse, France-based Airbus began assembling aircraft this summer at its new $600-million Mobile, Alabama, plant. Brazil’s Embraer S.A. now builds business jets in Florida.

What is reshoring?

Harry Moser, founder and president of the Reshoring Initiative, Kildeer, Illinois, defines reshoring as domestic production that replaces imports. Increasing exports of durable goods is not a sufficient metric for reshoring. If domestic manufacturing is truly ascendant, it should translate into fewer imports of manufactured items.

The Reshoring Initiative tracks corporate announcements and media reports on every instance of reshoring, companies kept from relocating operations offshore and foreign direct investment (FDI).

More than 60,000 manufacturing jobs were brought to the U.S. by reshoring and FDI combined last year, representing a 400 percent increase since 2003—a year that saw 140,000 manufacturing jobs shipped abroad, according to Moser.

More than 1,500 companies have used his organization’s Total Cost of Ownership Estimator to analyze the pros and cons of staying and leaving.

Moser cites a lighting fixture manufacturer that was buying Chinese aluminum castings, adopted the estimator and learned that it would save money by sourcing castings from U.S. companies. Some work stayed with the Chinese supplier but the U.S. casting company was able to make new tooling that helped the manufacturer to design and build new products. “They used the estimator wisely,” he says.

Why? Profits

The fundamental reason a manufacturer brings production back to the United States is that it’s “more profitable to make it here than to make it abroad and ship it here,” Moser says.

“What went wrong when going offshore, No. 1, was [lower] quality. The second and third problems were freight cost and lead times. Then labor costs went up. That raises the total cost of supply chain.”

In addition, some manufacturers want to restore or create an image or brand of “Made in the USA.” Says Moser, “They know consumers prefer American-made as long as the price is not too much higher.”

Industrial purchasing executives must “think about where the material comes from, too. If you want the USA label, you have to look at parts as well as the whole. Plus they have concerns about quality and warranty.”

Government incentives—“special deals on taxes, land, job training”—play a significant role, he notes.

Metals’ story

The Reshoring Initiative’s 19-page list of manufacturers that have invested in the U.S., Canada or Mexico includes metal producers, forgers, casters and formers (see table, page 22). Modern Metals did its own quick, unscientific survey of corporate announcements back through January 2014 (see table below). Investments include a $200 million bauxite processing plant in Louisiana; a $150 million aluminum production facility in Kentucky; and a $100 million copper tubing plant in Alabama.

“It is both possible and desirable to see a resurgence in American manufacturing that is fueled in part by reshoring,” says Scott Paul, executive director of Alliance for American Manufacturing (AAM), a Washington, D.C.-based group representing metal producers and labor.

AAM members hope that reshoring and economic recovery “can be jump-started with the right policies. Workers want it and the American public wants it,” says Paul.

Although many manufacturers “constantly evaluate the supply chain and sourcing, they aren’t nimble enough to have a new strategy every month or two,” but there is an argument to be made for rethinking the old strategy. 

“When China entered the world trading system in 2000, there was a pack mentality among management consultants, ‘You have to outsource to China.’ [Companies] looked at Chinese labor costs, low tariffs and other factors and said, ‘This is a smart business decision for us.’”

Following the Great Recession, manufacturers re-examined their cost structures and how best to stay competitive. They found that “things had changed. The industry was more automated,” so U.S. wages became less burdensome even as productivity remained high. But wages are rising offshore, “especially in China, closing the cost gap.”

Energy costs have dropped, particularly in the United States, for feedstock and byproducts and for running plants, Paul continues. He cites additional considerations “that are not top of mind but very important, such as inventory control, quality control, time zone and language differences. The loss of intellectual property is also a big factor. 

“Add all this together and it looks more attractive to manufacture in the United States.”

Dollars invested

While AAM’s observations don’t indicate there has been “widespread adaptation yet,” a lot of suppliers and OEMs are looking at the U.S. again and remodeling their sourcing decisions. “Examples of reshoring from the late 1990s to the Great Recession were hard to come by. But probably hundreds of companies have come back since then,” Paul says. “It’s encouraging.”

The automotive industry, arguably the second-largest consuming industry for metals after construction, is a prime example of both reshoring and foreign direct investment trends.

“Auto companies and others have chosen to locate production in the United States,” Paul says. “Not only have the Detroit Three invested billions and billions since the recession and bailout, we are seeing more Japanese, Korean and European automakers elect to open assembly operations in the U.S. That’s a good thing for the auto industry and a very large supply chain that adds value and adds jobs.”

Fostering innovation

It used to be that policy makers and corporate leaders perceived the U.S. as a knowledge economy and that it didn’t matter where things were made. The thinking was, “As long as we invent things, let someone else make it,” says Paul.

“That theory was put into practice but what was discovered is you need the production to be an innovative economy. If it’s on a factory floor across the sea, most of that innovation stays over there.” The battery industry was one example. “We had a hard time finding large-capacity fuel cells because battery production migrated to Asia, following the electronics industry.” 

To foster a highly innovative economy, “we need to conduct design and research but also the production in the States to realize the full benefits,” says Paul. Ninety percent of all patents awarded come from the manufacturing sector. Plus, two-thirds of private R&D investment are done in the manufacturing sector “so it’s a critical part of innovation economy.”

Policy goals

Government policies, says Paul, should be crafted “to accelerate reshoring,” but a vast incentive would be to invest in physical infrastructure, workforce development and R&D. “That helps to be competitive now and in the future. 

“We also need trade policies that help the U.S. to operate on a level playing field,” Paul continues. Undervalued currencies, for example, “have a profound impact on manufacturing. Output-wise we have been in a technical recession as a result of a strong dollar. The president talked about taking on currency manipulation ... but it is disappointing that not more has been done.”

Moser, too, is disappointed. The administration’s plan to export many more billions worth of U.S. goods has “not succeeded. Yes, exports are up 50 percent, but they have not doubled in five years. The trade deficit has, in fact, increased.”

The administration’s goal, he continues, “should have been to reduce the trade deficit but, politically, it sounds like protectionism. Importing less is the absence of something; exporting more is the presence of something—it’s less abstract,” therefore people can grasp it.

What the federal government should do is “address ways to help companies compete with cheap imports rather than support or incentivize exports,” Paul says. If so, the U.S. will be able to “bring together companies that can make things here.” MM