New research by strategy and operations consultancy The Hackett Group indicates China is losing its manufacturing advantage, while reshoring to advanced economies and relocation to lower-cost regions looks likely to grow.
The reasons are myriad, but China’s wage inflation together with stagnant manufacturing wages in the West, rising transportation costs and concerns about intellectual property have all resulted in a fundamental shift in where companies choose to do business.
In recent years global manufacturing—which has quadrupled over the past decade—has been a huge driver in world economic growth, with China reaping the most reward – its share in global manufacturing exports grew by 13 percent from 1990 to 2010.
This is gradually changing as landed cost, or the cost of end-to-end supply chain—from raw materials and components to manufacturing, transport, inventory and taxes—is becoming a driving factor, along with product quality and protection of intellectual property.
Companies surveyed in the study reported that in terms of cost, intellectual property rights and supply-chain risk there was as much deterioration as there was improvement, “indicating that it’s becoming increasingly difficult to achieve substantial benefits from offshoring and companies are starting to evaluate alternative sourcing options for manufacturing.”
According to the study, when the landed cost gap narrows to 16 percent companies begin to consider reshoring or moving to lower-cost regions. The landed cost gap with China is expected to reach 16 percent by 2013. My 2014 reshoring will impact 19 percent of global manufacturing.
High-tech electronics companies such as Apple might be the exception to the rule because their success is greatly dependent on rapid time-to-market, scalability and an enormous labor force.
From a public relations standpoint, the study argues, Apple might gain some advantage in reshoring its operations back to the United States. Given its recent bad press in China and the shortage of jobs in the U.S., it wouldn’t be a bad idea to reinvest in manufacturing at home. But the U.S lacks the huge labor force Apple requires to churn out its product and the U.S. can’t offer the same flexibility and rapid ramp-up time that China can.
Offshoring is still widely practiced, with 35 percent of manufacturers in the process of moving production from high-cost to low-cost countries compared to 20 percent who are actively undergoing reshoring initiatives. And low-skill manufacturing jobs will likely never return to the U.S., but instead move from China to lower-cost labor countries.
To remain healthy, the study concludes, manufacturing companies should keep a close eye on global trends, demand, and local competitive threats, and invest in manufacturing talent. Forward thinking companies will also invest in robust supply-chain analytics and have a plan in place to help counter geopolitical, environmental and supply-chain risks.
Do you believe there are benefits to reshoring? Will companies like Apple ever come home to the U.S?