A new turn in the U.S. manufacturing sector
January 7, 2015
It’s no secret that corporate managers are driven to maximize efficiencies. For U.S. manufacturers, this means that overseas facilities will often be part of the picture, given their ability to produce on a mass scale and bring down per-unit costs. Despite such advantages, there is a shift happening in the world of manufacturing, and it goes by the name of “reshoring.”
As the trend gets its footing, an increasing number of U.S. businesses are slowing down their overseas plants and opening up additional manufacturing capacity here at home. According to estimates published by Boston Consulting Group, millions of manufacturing jobs are expected to return to the United States by 2020. Since 2012, the firm has identified 300-400 companies that have reshored at least part of their operations. Some of the factors behind the relocations:
- Domestic companies wish to manufacture closer to their customers.
- Wages in the U.S. have weakened relative to other manufacturing centers, making domestic production costs more attractive. Consider that in 2000, U.S. wages were 22 times higher than China’s; by 2015, the multiple is estimated to fall to 4. (Data: U.S. Department of Labor; National Bureau of Statistics of China, via The Economist.)
- Foreign companies are increasingly setting up shop here in the U.S. (BMW, Lenovo, and Michelin are three notable examples).
It’s good news (on balance), but there are issues
The movement toward reshoring, with all of its positive sentiment, is offset by some forces that could complicate or slow its progress. Some of these headwinds include the rising costs of health insurance for U.S. workers, which are projected to spike 6.3% in the next 12 months, according to a survey conducted by the National Association of Manufacturers (NAM). Federal regulations comprise a second set of impediments. NAM estimates that manufacturers spend approximately $19,500 per employee in order to meet federal regulations; this is more than double the amount spent by other types of businesses on the whole.
A third possible headwind is that reshoring will probably not happen evenly across industries. For products that change quickly, such as fashion apparel and technology, reshoring will very likely make sense, affording management the flexibility to change course and maintain an ever-changing product line. On the other hand, for products that have a big customer base overseas, it will probably be more practical to keep the foreign factory. Meanwhile, for bulk goods — such as appliances — transportation costs could be a big factor in favor of reshoring.
What we’ll focus on going forward
As we monitor the shifting landscape in manufacturing, we will continue focusing on companies that challenge themselves to innovate, think creatively, and seek new solutions to consumer needs. The companies we favor will also tend to: (1) offer a unique product or experience that is difficult to replicate, (2) have an ability to protect pricing power and gain market share, and (3) have shown an ability to change in order to meet shifts in customer needs.
Fast facts: U.S. manufacturing
- In 2013, manufacturing accounted for 12.5% of U.S. gross domestic product.
- By itself, the U.S. manufacturing sector would be the eighth-largest economy in the world.
- Manufacturers conduct two-thirds of their research and development in the U.S., more than any other sector.
- For September 2014, manufacturing employment grew at its fastest pace since March 2012.
- For October 2014, the Institute for Supply Management’s index of manufacturing activity rose to 59.0 (from 56.6 in September), matching its three-year high.
(Data: The Economist; National Association of Manufacturers; Dow Jones)
The views expressed represent the Manager's assessment of the market environment as of December 2014, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
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