Why the U.S. is now winning the fight to keep manufacturing jobs onshore

By Bart Taylor | May 08, 2017

New research from the Reshoring Initiative confirms what many have been speculating: Rising costs for overseas labor and services and important brand considerations are now compelling U.S. companies to reshore jobs or create new jobs domestically.

From the new report:

"In 2014 and 2015 parity was reached between offshoring and returning jobs, indicating that the net bleeding of manufacturing jobs to offshore had stopped. As of 2016, for the first time, probably since the 1970s, there was a net positive gain in U.S. jobs. The U.S. has gone from losing about 220,000 manufacturing jobs per year at the beginning of the last decade, to adding 30,000 jobs in 2016. Measured by our trade deficit, of about $500 billion/year, there are still 3 to 4 million U.S. manufacturing jobs offshore at current levels of U.S. productivity, representing a huge potential for U.S. economic growth."

As Harry Moser, founder of the Reshoring Initiative, says in the new report, "The tide has turned." For American manufacturers, it may now make economic sense to manufacture in the U.S. where it didn't before.

Moser has been documenting trends in manufacturing economics for several years. His contribution has been to provide manufacturers data, to one, help them understand trends (such as: "What industries and companies are reshoring jobs, and why?"), and reevaluate their own offshoring decisions. "We get their attention by showing how much is happening, and then, appeal to them to reevaluate," Moser explains. "We have a free online 'Total Cost of Ownership Estimator' tool, which helps them go beyond their historical sourcing practices." For companies, that's always started with price, as in: "Where can I find acceptably competent workers at the lowest possible wage?"

But Moser's tool incorporates other elements that often add up to 15 to 20 percent of additional costs to send jobs offshore, like "carrying costs of inventory, travel costs, intellectual property risk, and the impact on innovation when you separate engineering from manufacturing (or bring them back together), the lost orders and lost customers when you have volatility in demand and you stock out because you have a two- to three-month delivery where you wouldn't have stocked out if you had a two- or three-week delivery because you have a local source or make it in your own factory here."

As he began running the numbers, what he suspected might happen, in fact did. "When companies do the analysis, in some cases -- not all cases -- it makes sense to bring the work back," Moser says. "To quantify that a bit, we took the first batch of cases we had with China versus the U.S., and in 5 percent of the cases that the company had done a cost analysis, the U.S. had the lowest price. But based on a total-cost analysis, the U.S. won 53 percent of the time, just by using the correct metrics."

Is the number improving, given rising wages in China and other historically low-wage markets? "We believe it is," Moser answers. "One the one hand, Chinese wages have been going up 13 to 15 percent per year. On the other side of that, the Chinese are investing more in automation and productivity than we are, so their productivity rate has been rising much faster than ours has been, and that counteracts some of that wage increase." The new data seem to confirm the trend.

Moser's analytics also coincide with a profound change in the how U.S. companies are building brands. Today, offshoring jobs and service contracts in pursuit of the lowest cost provider is out of favor, inconsistent with a new consumer ethos that favors quality and value -- often the added value of creating homegrown jobs.

Hap Klopp, founder of The North Face, provides an elegant explanation as to why companies reach a similar conclusion as those using Moser's total cost of ownership tool:

"The mistake the people in the apparel business are making right now is that they think it's a race to the bottom because of price, and everyone's trying to take 'make' out of the product. The real differentiation (for brands) is making something of value. If you're not afraid of making the best, you'll stand out from the crowd. 80 percent of the crowd are just trying to make something cheap, and the reality is that the cost of making these products at a distance is going up and up and up. The labor costs in China, in India, and in other places is going up much faster than in the U.S., and in eight or nine years the labor costs will be the same. Then the long lead times of getting products from Asia are really going to be a hindrance. There's going to be more close-to-home product manufactured, and addition to that, 'value' is going to take over. And a brand is shorthand for value."

The two related, but powerful trends -- a new emerging price equilibrium based on true total costs of offshoring jobs, and evolving consumerism that values local manufacturing and its positive byproducts -- are favoring the U.S.

It's important new methods evolve to shore up support. In keeping with Klopp's comment, the business and development ecosystem must rally to establish complete and compact supply chains that support local manufacturing. Gaps in the supply chain are plentiful. Labor tops the list, growth capital is stubbornly hard to come by, and the availability of structured services to accelerate growth companies is spotty. Some industries need more help than others.

But if a wave of new American brands equates success with quality manufacturing, and the economics of making are better here than overseas, maybe for the first time in decades, we may quietly have reached a tipping point. The tide might well have turned. The U.S. could finally be winning the war, if it's only begun.

Bart Taylor is publisher of CompanyWeek. Contact him at btaylor@companyweek.com.