The loss of manufacturing to low-cost foreign countries has reached its peak and many companies are making plans to relocate some production facilities back to the United States, according to new research from The Hackett Group.
The report is the latest evidence that reshoring is gaining momentum as the cost differential between production in places like China and the United States continues to narrow.
The Hackett Group said rising wage inflation in China and continued productivity improvements in the United States will converge within two to three years, creating more pressure on companies to make and source goods at home. Higher transportation costs as fuel prices escalate are also contributing to the erosion in savings from overseas production, as are rising costs for raw materials, inventory holding and duties.
(The June cover story in American Shipper
, "Right Shoring
," covers the potential for a U.S. manufacturing renaissance and sourcing production from nearby nations.)
Almost 75 percent of American companies surveyed by The Hackett Group have their own plants or contract with manufacturers in China. The business strategy firm estimates that activity supports between 15 million to 20 million jobs in that country.
The study found that companies are exploring reshoring as an option for nearly 20 percent of their offshore manufacturing capacity between 2012 and 2014. It said that the cost gap between the United States and China has shrunk by almost 50 percent during the past eight years, and is expected to stand at just 16 percent by next year. The Boston Consulting Group recently reached a similar estimate on the difference between U.S. and Chinese labor rates by 2015.
Many experts argue that Mexico and other countries in Latin America are likely to win the lion's share of manufacturing that exits China.
"As the total landed cost gap falls below 15 percent, the economic opportunity will require more companies to rebalance their supply chains and move capacity back closer to customers in the U.S.," David Sievers, a principal with The Hackett Group, said in a news release.
Companies are also looking for other low-cost manufacturing alternatives, such as India, Thailand, Vietnam and Brazil, according The Hackett Group and other analysts.
"As Chinese wage rates rise, companies are looking to maintain their competitive edge by either bringing that production closer to developed markets, moving it to lower wage countries, or increasing productivity in China," Chief Research Officer Michael Janssen said.
"I'm afraid this reshoring is still a trickle. It's not a trend" because U.S. policies aren't geared yet to supporting U.S. manufacturing, Scott Paul from the Alliance for American Manufacturing cautioned May 17 on MSNBC
's "Dylan Ratigan Show."
The United States had a record $295 billion trade deficit with China last year, he noted.
"There are some elements that make the U.S. much more cost competitive than we were four, five, six years ago I think we still do have a long way to go," Paul said. - Eric Kulisch