The same things that made shifting manufacturing processes overseas are now coming full circle to make domestic manufacturing attractive again.
More and more OEMs are asking U.S. manufacturers to help produce goods domestically once again. What is driving the re-growth of manufacturing in the United States?
Over the past ten years, steady growth has been achieved in US manufacturing jobs. (Image source: MAPI Foundation).
In 2017 job growth (due to reshoring) grew at the fastest rate in history and the trend is continuing.
1.) Tax and regulatory environment
Recent tax and regulatory changes have reduced the economic disadvantages of producing products in the United States. There may be offsetting factors, which involve the heavy use of certain raw materials, but those factors do not necessarily apply in technology-oriented products.
2.) High global consumer demand
Worldwide demand for new products is strong these days, taxing the capacity of many manufacturing plants domestically and abroad. As a result, those OEMs that are not committed to high volume up front are not getting the same attention from overseas suppliers as they would have in “normal” or slow times. This phenomenon presents new opportunities for domestic-based manufacturers and assembly services, which are proving to be more flexible and increasingly competitive in ramping up capacity.
3.) More efficient technologies and processes in manufacturing have reduced the impact of labor cost differentials across geographies.
For high volume manufacturing, it is tough for U.S.-based manufacturers to compete when the cost of production involves labor-intensive methods. U.S. labor rates remain uncharacteristically high compared to labor costs in other locations. As U.S. manufacturers employ more technology-oriented means of manufacturing, the impact of direct labor cost is often lower.
4) Domestic manufacturers are more responsive
Today’s rapidly changing technological demands and short product life cycles are making it necessary for manufacturers to be able to move extremely quickly to respond to market pressures and new technology opportunities. Overseas manufacturers may be optimized for consistent high-volume production flow, but they struggle with high-demand volatility and frequent fluctuations. It is harder for them to scale if volumes unexpectedly rise or if market opportunities do not ramp up as rapidly as expected, which reduce flexibility. U.S. based supply chain partners are often more agile and able to be responsive to quick changes.
5.) Transportation-related concerns
Companies manufacturing products in Asia are impacted by factors that are driving many products back to U.S. manufacturers. Transportation costs are rising. In rapidly changing markets, shipment via seagoing vessel is still the lowest cost option, which reduces flexibility. Only the smallest, lightest items can attain faster delivery, but that means via air, which is cost prohibitive in any reasonable volume.
U.S.-based companies have been choosing U.S based manufacturing. Pricing must be competitive, but in some scenarios, the lowest cost option does not always win the deal. There is now more widespread recognition of the significant “cost of doing business” with overseas partners in the form of hidden costs.
Examples of such hidden costs are the expense of sending a company’s staff overseas to bring onboard suppliers, manage company communications, and oversee the quality process. The burden can be incredibly heavy for a domestic company’s labor team to handle the innovation work, answer questions from overseas partners, and manage quality, etc. Worse, this incremental work by local groups often requires frequent or daily calls at crazy hours of the night or early morning as a result of time zone differences—a burden that is difficult for those team members.
These factors and many others are driving the shifting of manufacturing back into the U.S. by U.S.- based OEMs and their suppliers. Hallelujah!