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Re-Shoring, Off-Shoring. Same Result for the US economy?

| March 31, 2015

It all depends on who’s shore it is landing….

There has been a great deal of discussion about the process of Re-Shoring which describes the actions of Western companies relocating their production activities from Low Cost Countries such as China, back to their country of origin.

The motivations behind such actions are often described as patriotic and political, but it is clear that finance is in fact the key driver behind the momentum this movement is gaining. It is important to understand a significant portion of this activity includes Near-Shoring (bringing production closer to key markets) and not necessarily in Re-Shoring alone.

Now we strain to point to the continued advantages of China and other LCC’s as it is increasingly evident that the gap is narrowing significantly. A recent study by Alix Partners estimates that by 2015 (yes, this year) the cost of outsourcing manufacturing to China will be equal to the cost of manufacturing in the U.S.
“The Chinese manufacturing cost advantage has eroded dramatically in the last few years,” said Steve Maurer, AlixPartners Managing Director in Shanghai. “if you go back to 2005, it was pretty common for landed cost from China to be 25 to 30 percent less than the cost of manufacturing in the United States. Based on our analysis, well over two thirds of that gap has closed.”
The key factors behind this cost advantage erosion are:

  • The rising minimum wages (on average +12% annually for the last 10 years), bearing in mind that labor shortage is chronic in China and the large majority of manufacturing operations are now forced to pay labor rates that are much higher than minimum wage.
  • The rising value of China’s currency which is still considered undervalued by Western governments (an IMF report suggests that the Purchasing Power Parity analysis demonstrate that an appropriate exchange rate for the Renminbi is 3.95 per dollar and it is currently at about 6 to the dollar, therefore there is still lots of room for the RMB to continue devaluating, probably at the rate of 5% per year)
  • The cost of shipping goods thousands of miles from China to the consumer
  • Many other significant factors (I will save this for another post)

While it is easy to point to the reasons China may be losing some of its advantages, it cannot be overlooked that it still holds a major position in Consumer Goods manufacturing,with advantages that include an integrated upstream supply chain, fantastic infrastructure, high efficiency, a large stable of highly educated young graduates, engineers that understand their customer’s expectations, a culture of Quality that can no longer be discounted, a stable political environment and the sheer size of the installed manufacturing base.

Wait – the above statement applies to many Western countries, does it not?

While the evidence that China’s competitive position is under assault when compared to Western industrial nations, the inevitable exodus of export manufacturing from China is not necessarily a bad thing for China. Its domestic demand is growing between 8 and 10% annually, creating millions of new consumers for products that are currently manufactured there.Companies looking to re-shore are in a position to re-tool and re-focus their plants towards the domestic market and as a result extract double benefits from this paradigm. That’s a win-win if I ever saw one.

Chinese off-shore activities are on the rise. That’s a good thing.

Another little known fact is that Chinese manufacturers, brands and OEM’s are getting on the band wagon of Re-Shoring although for them it is clearly off-shoring. The cost parity between China and the US is a fact, but this fact applies in both directions, regardless of origin. For a US company, used to outsource to familiar OEM’s in China, what could be more natural then to encourage them to set-up operations in the US, taking advantages of the proximity to the consumer, fantastic regulatory environment, stable economy, predictable financial requirements, low corruption and transparent communication.
Evidence shows that many Chinese led entities have set-up operations in the US or nearby countries in an effort to diversify their industrial footprint and anticipate their eventual disadvantage at home.

For Chinese OEM’s and ODM’s, the opportunity to expand their industrial presence in Western countries can only be seen as windfall for Western jobs. Instead of concentrating on making Re-Shoring a patriotic event solely focused on domestic companies, we should instead place all our efforts in rolling out the red carpet for any foreign entity looking to displace their current activities. What a fantastic opportunity to reverse the paradigm that has seen China courting the world on behalf of its industrial base and insure that re-shoring is an existential event that has not been seen for generations.

Re-Shoring, depending on the entity’s origin becomes Off-Shoring. The result is the same.

 

 

AUTHOR - Richard S Ellert