Home » MBJ FEATURE » Coming home, part 1 — Some U.S. manufacturing groups see tipping point on overseas costs

Coming home, part 1 — Some U.S. manufacturing groups see tipping point on overseas costs

Rising costs, a weakening dollar, concerns over quality and a desire to be closer to developing markets have combined to make American manufacturers in Asia wonder whether they should come home — or at least target the United States for their next expansion, economists and manufacturing experts say.

Caterpillar is the most recent example, having decided that its plant in Japan was not logistically well suited for getting the plant’s small tractors and mini-excavators to emerging markets in South America and Europe. Last month Caterpillar announced it would shift its small tractor and hydraulic excavator manufacturing to Athens, Ga., a decision based in large part on the North Georgia city’s proximity to the ports of Charleston, S.C., and Savannah, Ga.

John Boyd, a principal with The Boyd Co. Inc., a site selection consulting firm in Princeton, N. J, told The Atlanta Business Chronicle the move is a likely “precursor of more reshoring projects.”

More companies overextended their supply chains to Asia and Europe and now battle wage increases in those countries and higher fuel costs, Boyd said. They also see the U.S. dollar’s falling value making it cheaper to manufacture products here rather than abroad, he said.

Mike Randle, editor and publisher of Southern Business & Development, is hardly restrained in his assessment of reshoring and the significant participation the South will have in the trend.

He estimates the Southern states lost 1,038,000 manufacturing jobs to China from 2001 to 2010. They could soon regain them — plus many more, Randle wrote in a recent piece for his magazine, which chronicles industrial site selection and economic development across Dixie.

“What if I were to tell you that there’s a good chance as many as three million jobs could be re-shored to the U.S. and Mexico over the next eight years? And what if I told you that the vast majority of the jobs re-shored to the U.S. will land right here in the American South?” Randle wrote.

Don’t look for a wave – what’s coming will look more like a tsunami, according to Randle.

Randle cites a May 2011 study by The Boston Consulting Group titled “Made in America, Again: Why Manufacturing Will Return to the U.S.”

Unless the product is labor intensive and headed for Asian markets China should not be the default option for manufacturing, suggests Boston Consulting Group, a global management consulting firm and leading advisor on business strategy.

The study projects that with China’s labor costs rising 15 percent to 20 percent annually, increased costs in the massive Asia nation will slash its labor advantage from 55 percent today to 39 percent by 2015, when adjusted for the higher productivity of U.S. workers.

“For many goods, when transportation, duties, supply chain risks, industrial real estate and other costs are accounted for, the cost savings of manufacturing in China rather than in some U.S. states will become minimal within the next five years,” The Boston Consulting Group study predicts.

The transformation will be propelled by rising incomes in China that will lead multinational companies there to devote their manufacturing capacities to serving the domestic Chinese as well as the larger Asian market, the report added.

When all costs are taken into account, certain U.S. states such as South Carolina, Tennessee and Alabama will turn out to be among the least expensive production sites in the industrialized world, the report says. “As a result, we expect more companies to begin building more capacity in the U.S. to supply North America.”

Boston Consulting Group has identified manufacturing sectors that are at a “tipping point,” in that production in the United States is suddenly a viable option.

In addition to transportation goods, electrical equipment/appliances, and furniture, the sectors most likely to return are plastics and rubber products, machinery, fabricated metal products, and computers/electronics. Together, these seven industry groups could add $100 billion in output to the U.S. economy and lower the U.S. non-oil trade deficit by 20 to 35 percent, according to BCG.

The tipping-point sectors account for about $2 trillion in U.S. consumption per year and about 70 percent of U.S. imports from China, valued at nearly $200 billion in 2009. The job gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail.

“This does not mean that factories in China will close,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Instead, more of their output will be consumed in the fast-growing domestic market and elsewhere in Asia.”

Randle said reading The Boston Consulting Group report led him to contact David Rumbarger, chief executive officer of the Community Development Foundation in Tupelo.

“I am working 29 big manufacturing projects and I have never worked that many here at the same time,” Rumbarger told him. “And here is another thing. Mike, you would have laughed me out of the room if I told you this five years ago. Several of those 29 projects are coming from the furniture industry.”

Furniture?

Yes, maybe — according to Bill Martin, director of the Franklin Furniture Institute at Mississippi State University. “I think we’re seeing some of it. It may not be quote ‘reshoring,’ but we are seeing that jobs are not leaving,” he said. “We are investing domestically rather than taking those jobs overseas.”

In fact, the “reshoring” issue was a key focus of an all-day Manufacturing Summit held in Starkville last Wednesday that featured talks by furniture manufacturing executives Wyatt Bassett of Vaughan-Bassett Furniture and Bruce Cochrane of Lincolnton Furniture on why they selected Galax, Va., and Lincolnton, N.C., respectively, for their furniture factories instead of China or elsewhere in Southeast Asia.

Said Martin, “We’re trying to create awareness that costs are rising in China. And you’ve got those hidden costs you don’t identify. We’re just trying to wake people up.”

In summing up his thoughts on the trend, Randle had this to say:

“According to Rumbarger, tiny Tupelo, Miss., which I referred to earlier in this story, has lost 30,000 manufacturing jobs to China in the last 10 years. Per capita, that total is one of the highest of any single location in the entire country. Yet, if furniture projects and jobs are coming back to places like Tupelo, then anything goes when it comes to re-shoring jobs from China to the South.”

Editor’s Note: This is the first in a series that looks at reshoring in the United states in general and in Mississippi in particular. To read part 2 click here.

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