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 to 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, making domestic production costs more attractive. Consider that in 2000, U.S. wages were 22 times higher than China’s; it is estimated that this multiple will fall to 4 times this year. (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, But There Are Issues
There are some issues that could complicate or slow the progress of reshoring, however, including 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 are also a hurdle. NAM estimates that manufacturers spend approximately $19,500 per employee to meet federal regulations; this is more than double the amount spent by other types of businesses on the whole.
Also, reshoring will probably not happen equally among all industries. For products that change quickly, such as fashion apparel and technology, reshoring will very likely make sense, affording corporate management teams the flexibility to change course and maintain an ever-changing product line. Companies with bulk goods--such as appliances--must deal with transportation costs, and that could also be a big factor in favor of reshoring.
But those companies whose products have big customer bases overseas will probably find it more practical to keep the foreign factories.
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)
Scott P. Hastings is an analyst for Delaware Investments real estate securities and income solutions (RESIS) group, performing fundamental bottom-up stock research across several subsectors of the domestic REIT universe, and focusing on opportunities in Canada, Europe, the United Kingdom, and Australia for the firm’s global REIT effort. Prior to joining Delaware Investments in 2004, he was a senior auditor with Deloitte & Touche.