PwC: The Seven Factors Behind Reshoring
By Metal Center News Staff
on Oct 2, 2012
Manufacturers’ fixation on low-wage workers drove many companies to relocate overseas, but it will take more than just equalizing labor costs in China and other developing countries to lure them back to the United States. Nevertheless, there are compelling reasons for U.S. companies to consider reshoring, say analysts at PwC US in their new report, “A Homecoming for U.S. Manufacturing.”
“The reviving industrial manufacturing sector is instrumental to U.S. economic recovery,” said Bob McCutcheon, PwC’s U.S. Industrial Products leader. “Beyond the cyclical rebound, however, many structural changes are emerging that may lead to the U.S. becoming an important location for basing production and R&D facilities.
PwC's report notes that localizing production can mitigate supply chain disruptions, which cost U.S. industrial companies $2.2 billion in 2011. Companies contemplating the reshoring of production facilities back to the U.S. must consider the following factors, PwC says:
- Transportation and Energy Costs: The bull market in energy commodities over the last decade has contributed to a major increase in transportation costs for manufacturers with global supply chains. Given growing global demand for energy, transportation costs will likely remain elevated, making production closer to home more attractive.
- Exchange Rates: Though the numbers can fluctuate, the U.S. dollar generally has depreciated during the past decade, narrowing the cost gap between producing in the U.S. and most foreign locations, including China. Moreover, the yuan is more likely to continue to appreciate in the future.
- U.S. Demand: Though China and other developing countries will grow faster than established economies, the wealth disparity between the U.S. and these emerging nations will continue to allow for the U.S. to drive demand for most manufactured goods. The difference in the relative standard of living, coupled with the size of the U.S. market, supports investment in new domestic production of goods targeted for U.S. consumption.
- U.S. Talent: While the gap is narrowing, the level of education and training in the United States outranks what is found in developing countries. Institutional advantages in education and experience may allow the U.S. workforce to retain an edge over its foreign peers.
- Availability of Capital: The balance of risks favors some continued credit tightening in several key economies, including the U.S. and China, to stave off inflation. As a result, manufacturers may shy away from longer supply chains and the risks they carry, including inventory tied up in transit.
- Tax and Regulatory Climate: The U.S. now has the highest statutory corporate tax rate among developed countries, which has spurred talk of tax reform to boost economic growth and employment. Until then, the tax and regulatory environments bring uncertainty to the current expansion of domestic manufacturing.
- U.S. Labor Costs: Higher labor costs in emerging economies, especially China, are challenging profitability for some industrial manufacturers. From 2008 to 2011, China’s hourly manufacturing labor costs rose by over 80 percent and are expected to rise at a similar rate for the next four years. This compares with the estimated annual increase of around 10 percent for the U.S. However, the cost premium, based upon the difference in absolute wages between the U.S. and China, has continued to expand, making it possible that labor arbitrage involving China and other low-labor-cost emerging markets will persist, the report concludes.
“Industrial manufacturers may increasingly rethink their U.S. strategies, including the merits of continuing to separate production and R&D, and producing abroad and importing back to U.S. buyers. Depending on the industry, there may be considerable benefits to establishing regionalized supply chains and R&D facilities in the U.S., such as reducing costs, shortening lead times, protecting intellectual property and mitigating many of the risk factors inherent in developing markets,” says McCutcheon.