FMA economist says companies are increasingly abandoning offshoring because assumptions were premature, not accurate
Jul 1, 2010 12:00 PM, By Rick Weber
FOR a number of years, the trend was to move manufacturing operations offshore to a place where conditions seemed to be more conducive — specifically where labor and production costs were lower.
But according to Dr Chris Kuehl, chief economist for the Fabricators & Manufacturers Association (FMA), many of the assumptions that were made when that outsourcing process began have been revealed to be a “little premature and not necessarily accurate.”
The result? We're seeing a wave of “nearshoring” — essentially the redistribution of work back to the United States and North America.
In an FMA Webinar, “Bringing the Work Back Home: The Joys of Nearshoring,” Kuehl said it involves US companies that moved production overseas in order to save money on labor or to take advantage of lower cost inputs; foreign companies that once concentrated their production in their home countries; and start-up manufacturers that have elected to keep their activity in or near the US.
He said there are a number of inhibitors that provide excellent opportunities for nearshore providers:
Geopolitical risk.
“We're dealing with all kinds of potential political issues all over Asia. There is instability in a lot of countries where manufacturing shifted to. That affects supply chains. That has affected the ability of a lot of companies to function.”
Unknown vendors.
“Moving into China is one thing. When people say, ‘We're going to do business in China,’ well, where? Are you in some remote province? These are really different environments. Companies go to China and find themselves kind of locked out because China wants development elsewhere. China is pushing people into remote areas to help employment there. Which gets you into the issue of unknown vendors. A lot of companies have appeared on the scene, saying, ‘I can do this.’ The first companies going in got the cream of the crop. People going in there now are finding these companies are not prepared. They don't have the workforce prepared to participate in a modern economy.”
Language and culture.
“The average Chinese manufacturing worker has been in an urban environment, working in a manufacturing plant less than 18 months. Prior to that, they lived in a rural area. The majority don't speak Mandarin or Cantonese; they speak a local dialect. It can create serious language barriers.”
Lose control.
“If there is one thing convincing people to move back to the US, it's control. It's one thing if I'm in a forgiving mass-production environment. If I have moved to almost a custom manufacturing environment where changes are rapid and they demand rare sophistication, it is much harder to communicate that across large distances, even with all the advances in technology and communication. The number one thing companies who left China or other countries say is, ‘We could not have the control we needed to maintain the relationships we wanted to with our consumer base.’ ”
He said Europeans have seen a “tremendous amount of manufacturing” coming back to Europe, despite hourly rates that are four to five times what they are in Asia.
In the US, the rate of manufacturing as a percentage of the employed was 6% in 2009 — down from 9% in 2000. But Kuehl said the decline started “long before offshoring became common. This is a trend that accelerated but had been happening for quite some time. We're seeing a lot of shifting to other states and just a loss of jobs period. They're not moving anywhere. They're just being eliminated.”
He said that despite a dramatic reduction in US employment, productivity numbers continue to rise.
“The average worker has been made a lot more productive by machinery and technology,” he said. “Our productivity edge has been maintained, and even grown. Even during the recession, we didn't have a single quarter when productivity went down.
“We saw a huge loss in jobs in the beginning of 2009. In the earlier part of this year, some came back. How do we get employment numbers down to reasonable levels, down to 5% or 6%? Manufacturing will be used increasingly as a tool to get people back to work.
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