July 22, 2011

Will Insourcing Bring Back 'Made in America'? (Guest Post)

By Stan Abrams

"Insourcing," “reshoring” or "onshoring" are popular terms these days, words used to refer to the process whereby domestic companies pull back their overseas operations (mostly referring to China) in favor of local manufacturing.

There are two things that are worth a glance here: first, the business and economic factors that are pushing reshoring, and second, the political context.

As to the motivating factors, there are several things going on here:

1. Many small businesses that jumped into China a few years ago are just now realizing that there are hidden costs of manufacturing here.

The experience of SMEs in China has been written about many times, including in the Fortune series, so I won’t rehash everything here. However, note that SMEs are particularly vulnerable to the costs associated with quality control, travel, and communication that multinationals (MNCs), many of which already have China-based infrastructures and personnel, are able to minimize.

Just think, for example, of how expensive it is to maintain good government relations in China, a cost that small firms are often not able to absorb.

2. Energy costs are often the wild card.

We’ve seen this before, most recently with the price run on oil in 2008. At the time, several businesses with tight profit margins abandoned their China manufacturing operations and went home. It’s an obvious point but bears repeating: China is a long way from markets in North America and the EU, and shipping represents a significant cost for many firms that can tip the scales towards reshoring.

3. Wage and other price inflation in China continues.

This is not new, but inflation has recently accelerated. As I’ve said before, hot manufacturing areas in China like Shenzhen/Dongguan have experienced wage inflation for years now. That wage inflation is now widespread on the East coast.

4. U.S. is now more competitive.

You can look at this two different ways. The positive take is that the U.S. is leaner and meaner than it was a couple years ago and is now better able to compete. A more negative viewpoint is that the reason why labor is plentiful and rents are cheap is that the U.S. economy has been in the tank for a few years, with no prospects for a dramatic recovery in sight.

5. Globalization is not as easy as we once thought.

This is quite a generalization of course. What I mean is that international business is complicated and difficult, and many firms are not equipped to handle those risks.  One can hop online and find a service company that will provide door-to-door service facilitating your outsourcing needs, but quality control, time management and other issues can still rear up and bite you later on. 

Additionally, in the wake of Japan’s recent natural disaster and the disruptions to logistics, many firms are questioning the risk calculations they once made regarding attenuated supply chains.

While all of these factors are indeed present, it should be pointed out that in only a small number of cases do the planets align properly, the numbers add up, and it actually does make sense to move back home. And for companies that also sell to the China market, the new math might suggest a jump to Vietnam or elsewhere in Southeast Asia, but certainly not back to the West.

Despite this, I think that the media loves running articles built around reshoring anecdotes. Just a feeling I have, mostly based on the second thing I wanted to mention, the political context of this phenomenon.

Western politicians frequently like to pump up their constituents by telling them about how competitive their workers are, and how their unemployment problems would be miraculously solved overnight if other nations would simply “level the playing field.” This has been the rhetoric of US-China trade for years now.

Reshoring can be spun a couple of different ways. I expect that during the coming campaign season, we will be treated to several rallies held at US-based factories that have been expanded or recently opened. These will be held out as examples of the indomitable will of the American worker, with nary a peep out of anyone about energy costs or housing price deflation.

Similarly, I think the media runs these as “feel good” features, a bit of sunshine amidst gloomy economic forecasts. Some of the bad news implicit in reshoring certainly isn’t lost on the journalists writing these pieces, but you’d never know that by reading the headlines or the first few grafs.

The bottom line is that reshoring as a phenomenon is very limited (let’s face it, those jobs are not coming back in large numbers), fluctuates based on quite a few external factors, and carries along with it as much bad economic news as good. Nevertheless, get used to reading about it in the papers.

Further Reading - China, Idaho, and U.S. Manufacturing

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor. Stan has an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, and a B.A. from Pomona College.  He blogs at China Hearsay.  

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

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