What’s really behind reshoring?

By Bryan Livingston
Executive Vice President and Principal

When someone mentions reshoring – the return of offshored manufacturing activity to the US from abroad – the primary cause that first comes to mind is the narrowing of the wage gap between China and the U.S. While an important factor, the steady narrowing of wage differences is possibly less important for most industries than the rapid shift in the availability of less costly oil & gas resources brought about by advanced drilling and well completion technologies. In fact, the fracking revolution is driving the relocation of manufacturing from Europe, Asia and Latin America to the U.S. Since 2010, the Reshoring Institute estimates that more than 15% of the manufacturing jobs added in the US have been jobs returned from overseas.

Two key advantages have come into play that explain many recent reshoring decisions – cost of energy and significantly lower feedstock costs for the manufacturing of plastics.

The U.S. currently has the same kind of advantage in energy that China once had in wages. What U.S. manufacturers pay for natural gas in the shale gas era – between $4 and $5 per million BTUs – looks pretty darn good versus $10 in Europe and Asia’s costs which have approached $20 per mBTU on the spot market in recent years. Of course, reducing energy costs is important to every business, but for a manufacturer who uses natural gas as a feedstock for its product as well, lower energy costs can be a huge global competitive advantage. That’s the conclusion the Egyptian company, Orascom Construction, came to as it was deciding where to build a $1.4 billion fertilizer plant. It’s going up in the U.S. near a natural gas pipeline.

And don’t underestimate the work ethic of Americans. According to the U.S. Bureau of Labor Statistics, nonfarm business productivity increased at an annual 3.2 percent rate during the fourth quarter of 2013. And the productivity of the manufacturing sector increased at a two percent annual rate during the same quarter. Domestic manufacturing output grew by 6.6 percent in the quarter while unit labor costs were dropping by one percent. Producing more for less is the definition of improved productivity and we’re pretty good at that.

Many of our improvements in productivity have come from our penchant for applying technology on the factory floor. Factory automation is critical, of course, but we’re also good at deploying technological advancements to fine tune the manufacturing process even further. Breakthroughs in specialized optics, highly accurate sensors and advancements in material handling solutions are being adopted in U.S. factories broadly, making them significantly more competitive globally.

In a nutshell, reshoring comes down to rethinking the manufacturing model. As one commentator said in a recent article titled “The Fracking Renaissance” in the Breitbart Newsletter, it really doesn’t make a lot of sense to ship materials halfway across the globe only to ship them back again as manufactured goods. That’s changing. For example, NCR, the producer of ATM machines among other products, and Jarden, a $7 billion US manufacturer, have seen the light. NCR closed plants in Scotland, Brazil, Canada and Texas, but upgraded its plants in China and Georgia. Two years later, the Georgia plant was out-producing the Chinese factory by such a wide margin that NCR decided to consolidate much of its production in the U.S. The thinking was that the company could provide more innovative products faster with its factories closer to the markets that they served. You’ll hear a lot of companies echoing this same thinking in the years ahead.

Jarden, which had been manufacturing consumer goods in 60 plants in 30 countries, decided to move the production of four major products to factories in the U.S. and Mexico. Why? Time-to-market, innovation and a shorter supply chain. As a result, Jarden has improved its capacity utilization rates through lean manufacturing techniques.

A New Era?

A recent report by McKinsey & Company, “Manufacturing in the future: The next era of global growth and innovation,” predicts that manufacturing is entering a dynamic new phase. Of course, the caveat will be how an uncertain environment with volatile resource pricing, a looming shortage of skilled workers and increasing wages will affect the global economy.

If I were a betting man, I’d wager that North America – the U.S. and Canada – will be right there with the best of them.