There are few issues that our two political parties can agree on, but one that has been at the forefront during the last two decades and the subject of every State of the Union address has been the issue of “bringing good paying jobs back to America.” President Obama made a reference in the recent State of the Union address when he stated that 50 percent of employers are considering bringing jobs back to the U.S. The president praised Master Lock for returning 100 jobs to Milwaukee from China. But is 100 jobs an anomaly or a sign of things to come?
For most U.S. companies, the trend to “offshore” manufacturing and assembly work to companies in China and other parts of Asia made economic sense at the time. Manufacturing facilities could be constructed in Asia at a lower cost than in the U.S. with little regulation, and labor could be provided at lower prices. Additionally, there was a general perception that U.S. quality levels were lower than offshore quality. But things began to change in the last few years as the economic recession reduced labor rates in the U.S. and labor rates in developing countries in Asia began to increase, leveling the playing field. Since 2010, more than 200 companies, mostly U.S.-based, have brought back production they had sent out of the country.
Another form of “onshoring” involves foreign companies offshoring their jobs to the United States. The first major industry to bring jobs to the U.S. was the automobile industry. Today, virtually every European and Asian automaker has assembly plants in the country. Volkswagen was the first foreign automaker to establish a plant in the U.S. In 1986, the Big Three automakers accounted for 95.4 percent of U.S. production; by 2006, it was down to 63.6 percent. Foreign automobile plants in the U.S. are producing cars at a higher quality level and at a lower cost than in Europe.
And it is not just the automotive industry — across all industries, from 2007 through 2012, foreign investment in U.S. manufacturing totaled $493 billion versus $270 billion the previous six years, according to the Organization for InternationalInvestment (OFII).
Over the last decade, several factors have changed such that onshoring of jobs by U.S. companies and offshoring by foreign companies will continue to increase significantly over the coming decade:
- The rising cost of labor in China. Wages in China are rising at a 15 percent annual rate such that by some predictions, U.S. manufacturing costs and manufacturing costs in China will equalize by the end of 2015.
- The rising strength of China’s currency. The strength of the Chinese economy and international opinion on floating their currency is putting pressure on the Chinese currency, combining to make Chinese-produced goods more expensive.
- Wage rates in the United States. The severe recession of 2008 and the bankruptcy of the auto industry created downward pressure on U.S. labor rates making U.S. labor more competitive. Health and welfare benefit plan costs were reduced and unions began to renegotiate employee contracts.
- Fuel and Production Costs. The abundance of natural gas in the U.S. is literally “fueling” the onshoring of jobs to the U.S. Many plants have converted to natural gas and the comparison of costs is dramatic. In Asia, natural gas can run $18 for 1 million British Thermal Units (BTU), in Europe $10, and in the U.S. $4. Rising shipping costs and shipping time raises the costs to get goods to market.
- Changing Perceptions. In many foreign countries, goods made in the U.S. are held in high esteem and, in general, are perceived to be of better quality than foreign goods. That, coupled with the younger generation’s positive view of American culture and the fact that quality has improved significantly, is creating a demand for U.S.-made goods. Foxconn Technology Group, a Taiwanese manufacturer, will spend $30 million on a new factory in Harrisburg, Pa., that will employ up to 500 people to meet the demand of their customers for U.S.-manufactured goods. Apple AAPL -1.06%, long noted for designing their products here but manufacturing overseas, announced the creation of a glass manufacturing plant in Mesa, Arizona, and a computer manufacturing facility in Austin, Texas.
- Economic and Tax Incentives. The Obama administration has proposed a 2 billion dollar per year tax credit to encourage employers to return jobs to the U.S. and the elimination of tax deductions for shipping jobs offshore. Other tax credits such as the Work Opportunity Tax Credit had been extended through 2013. Both political parties favor incentives for returning jobs to the U.S.
So what has been the experience of onshoring jobs? By example, a large metal fabrication company moved overseas jobs back to high-cost California and was able to increase their gross margin from 20 to 30 percent through a 75 percent reduction in warranty and rework costs.
The story is no longer one about lower labor costs overseas. There is a flow of returning jobs that is gaining momentum every day and it looks like may be here to stay. Will the trickle become a torrent?