Reshoring Recommendations for the Federal Government, especially
Department of Commerce
Executive
Summary
The
economic bleeding due to increasing offshoring has stopped. The rate of new reshoring is now equal to the
rate of new offshoring. The challenge is
now to reshore the 3 to 4 million manufacturing jobs that are still offshored. Recent
reshoring announcements and successes by Apple, Caterpillar and GE and analysis
of the economics of reshoring suggest that we could raise the net reshoring
rate from the current zero jobs/year to 50,000.
For the U.S. to achieve its full reshoring potential requires a
continuation of offshore cost trends, improvement in U.S. competitiveness and
changes in companies’ sourcing decision metrics. The U.S. government can influence all of
these factors with minimal expenditure to achieve the 2016 scenario shown below.
Manufacturing Jobs / Year
|
||||
2003
|
2013
|
% Change
|
Feasible 2016
|
|
New
offshoring *
|
~150,000*
|
30-50,000*
|
-
70%
|
20,000
|
New
reshoring
|
2,000*
|
30-40,000**
|
+
1,500 %
|
70,000
|
Net
reshoring
|
-148,000
|
~0
|
-100%
|
+50,000
|
*Estimated / ** Calculated
Background
Reshoring[i],
the return of manufacturing that was earlier offshored, is based on the
economic logic of producing or sourcing near the consumer. The reshoring trend over the last 4 years is
driven by a range of factors including rising offshore costs and the increased use
of Total Cost analysis to recognize the offshore costs, including many costs
previously ignored by the 60% of companies that only look at wage rate,
ex-works price or landed cost. Due to
their inaccurate sourcing decisions, companies’ excess offshoring represents an
economic inefficiency that can be corrected at low cost. It is less expensive to educate companies
than to incentivize them.
It is estimated that if all companies used Total
Cost of Ownership (TCO) analysis, 25% of the offshoring would come back. About 100,000 manufacturing jobs have already
been reshored in the last 4 years.[ii]
That surge represents about 15% of the total increase in manufacturing jobs
since the low of January 2010. The reshoring trend is growing, with increased
media coverage, growing consumer preference for Made in America, and companies
reevaluating their sourcing decisions.
Seven sectors have been identified by Boston
Consulting Group as especially economically viable for reshoring: transportation
goods, appliances and electrical equipment, furniture, plastic and rubber
products, machinery, fabricated metal products, and computers and electronics.[iii]
The 10 most commonly cited reasons for reshoring are:[iv]
1. Wage and Currency Changes
|
6. Inventory
|
2. Quality, Warranty, Rework
|
7. Intellectual Property Loss or Risk
|
3. Delivery
|
8. Total Cost
|
4. Freight Cost
|
9. Communications
|
5. Travel Cost/Time or Local
Onsite Audit
|
10. Image/Brand (prefer U.S.)
|
The U.S. Government has provided some support to reshoring
as a key component of rebuilding U.S. manufacturing. Government actions
include: the White House Insourcing Forum Jan. 11, 2012; six MEP webinars; postings
on Commerce websites; the online ACETool
resource, the MEP Supply Chain Optimization project, SelectUSA and the Make it
in America Challenge, all of which have been helpful in getting the word out.
Much more needs to be done.
In contrast, in 4Q2013 and 1Q2014 aggressive government
reshoring programs have been announced by UK, France, Korea and the EU. At
Davos 2014 Prime Minister Cameron announced that “there is a chance for Britain
to become the “Re-Shore Nation”[v]
and that they are “setting up a one stop shop to help businesses capitalise on
the opportunities of re-shoring.”[vi] These governments recognize that the U.S. is
leading in reshoring. They are now doing more than is the U.S. government to
promote and enable reshoring.
Moving
Forward: How to Advance Reshoring
Reducing our trade deficit is the best
route to improve the economy, employment and government deficits. Continued
efforts at the Federal level are necessary to ensure maximum reshoring. We have
identified actions that require no or minimal government expenditures or tax
revenue reductions. The following suggestions for future efforts are based on
four realities. First, most companies
will only reshore if they believe that it is in their economic interest to do
so. Second, it is in their interest today
to reshore some and offshore less. The
proportion that should be reshored is increasing. Third, increasing reshoring, i.e. reducing
imports, is much easier, more cost effective and more controllable than
increasing exports because U.S. companies are 30 to 50% more price competitive
here than when exporting. Fourth, despite the above, the majority of offshored
production will not come back until the U.S. becomes more cost competitive in a
range of products, especially consumer products.
Achieving
More Reshoring in the Current Economic Environment
Corporate cultures, reward systems and
investments have been heavily focused on offshoring. Many companies followed each other offshore
in herd behavior. In the current economic environment the most immediate,
feasible, non-political and cost effective way to change their behavior is to
educate and encourage them to reevaluate their sourcing and production
decisions: domestic vs. offshore. Recommended
government actions:
1.
Generally: Make reshoring/manufacturing
the top priority at MEP, EDA, SelectUSA, SBA, Labor, Education, etc.
2.
Proposed DOC actions:
a.
Invest as much in reshoring/TCO as in
export promotion. Government emphasis
has been overwhelmingly on exporting more. Perhaps a thousand government
employees are promoting exporting, spending $100millions/year. At most a few employees and proportionate $
are focused on reshoring even though reshoring is easier, higher payback,
undeveloped and suitable to more companies.
As a typical example, DOC’s homepage says: “The Commerce Department's
mission is to help make American businesses more innovative at home and more
competitive abroad.” Change the mindset
and edit the text to “...more competitive at
home and abroad.”
b.
Create a Reshoring office that focuses
on reshoring as SelectUSA does on Foreign Direct Investment (FDI).
c.
Strengthen Commerce’s ACETool
to include data relevant to additional cost and risk factors, including:
opportunity costs; impact on innovation when companies separate engineering and
manufacturing; impact on product differentiation, etc.
d.
Emphasize outsourcing domestically vs.
offshore. Provide forums for bringing
together potential domestic suppliers and U.S. based companies that are
outsourcing offshore.
e.
Support programs such as the one
developed by the Reshoring
Initiative and Datamyne.
First, identify categories of imports that have the following characteristics:
high $/year; U.S. capacity is available or achievable; U.S. production would be
competitive on a TCO basis. Second,
encourage and train the importing companies to use TCO to reevaluate their
sourcing and siting decisions. Third,
bring the importers together with relevant U.S. suppliers. Fourth, as needed, help the importers and
suppliers apply lean, advanced manufacturing, training, etc. to become
competitive vs. imports. Fifth, if needed, invite FDI by proven foreign
suppliers to fill ecosystem gaps.
f.
Document and publicize reshoring
successes, especially those achieved after using TCO. Recognize and promote the
Reshoring Case of the Month/Year/etc.
g.
Understand and minimize the cost of
transitioning work back to the U.S. For example tooling being used in China is
often not good enough for U.S. production. U.S. tooling is too expensive. Support
development of U.S. tooling that is good enough but not too expensive.
3.
Proposed other U.S. government actions
a.
President Obama has done a good job
talking about “insourcing.” It would be more effective if government spokesmen
(President Obama, Secr. of Commerce, congressmen, etc.) get more specific and call
for companies to use TCO and reevaluate their sourcing decisions. Personally challenge
individual companies, e.g. GE and Honeywell, to consistently utilize TCO.
b.
Aggressively challenge NAM, U.S.
Chamber of Commerce and Business Roundtable to encourage their members to
reevaluate sourcing decisions, to check whether they are hurting both their
bottom lines and their country.
c.
Find one or more large companies that
will take the lead in implementing TCO and serve as poster-boys/references for
other companies.
d.
Calculate the environmental impact of
producing in China instead of the U.S.
Ask companies that have Green policies to consider the data in their
sourcing decisions.
e.
Have EPA and OSHA estimate what
bringing China’s economy to modern environmental and safety standards will cost
in investment and operating expenses for the companies that operate there.
f.
Change the WARN act to include a
requirement that companies that plan to lay-off and offshore complete a TCO
analysis prior to issuing the notification. Provide help in the analysis. Bring
in MEP, etc. to help improve competitiveness.
g.
Require all corporate recipients of
government funding to either Buy American or have used TCO before they source
offshore.
h.
Require federally funded public
infrastructure projects to use TCO and also to include in the calculation the
externalities impacts on the region and the U.S.
i.
Encourage MBA and supply chain
management programs to teach the economics and method of reshoring/TCO.
Improving
the Economic Environment
Companies will only bring back the
majority of offshored work if the economics of producing in the U.S. improve. The
actions needed for more reshoring are the same as needed for manufacturing in
general. The highest priorities, in addition to the oft-discussed but
apparently impassible, major corporate tax, VAT and regulatory changes, are:
1.
Skilled
workforce:
a.
Make it the primary focus of the Labor
and Education Departments to provide the manufacturing workforce needed to
balance the trade deficit. Other objectives will be achieved if this one is
accomplished. Change the emphasis from “Education Pays”[vii]
to “Education and Training Pay.”
b.
Review the major websites of Commerce,
Labor, and Education to be sure manufacturing and the desirability of skilled
manufacturing careers are presented at least objectively.
c.
Focus student loan funding on manufacturing
technology via community college and apprentice scholarships. By making apprenticeships more attractive for
the worker and employer, there will be more apprenticeships at minimal cost to
society.
d.
Provide a website for posting best
practices of recruiting and training.
e.
Provide SBA equipment loans to weaker credit
companies that add manufacturing apprentices. Thereby improve credit, skilled
workforce and productivity.
f.
Promote manufacturing as not just good
for the country but as providing a better career for many citizens who could
alternatively get a university degree. Pres. Obama has done a good job
supporting skills training. He could do a better job of promoting the returns
to the individual of selecting that training relative to a 4-year, especially
liberal arts, degree.
g.
Provide
the tools for students to compare a skilled manufacturing apprenticeship or
community college degree vs. attending a 4 year college, especially for a
liberal arts degree.
h.
Ideally,
adopt the Swiss and German dual track system of apprenticeship.
2.
Currency
China, Japan and others have manipulated
their currencies to the massive disadvantage of the U.S.:
a.
Vs.
developed countries: hold or gradually reduce the U.S. currency until we have a
neutral trade balance with them.
b.
Vs.
China: Insist on a massive, continuous reevaluation, e.g. to 3 Yuan/USD over
the next 5 years or impose commensurate tariffs.
3.
Industrial
Ecosystem
a.
Identify
gaps that prevent Apple and others from aggressively reshoring.
b.
Encourage
U.S. or foreign companies to fill the gaps. Use SBA loans, MEP, SelectUSA, etc.
4.
Other
Call on the Reshoring Initiative for
help.
We have also identified roles for OEMs,
unions, local and state governments, retailers, consumers, Wall Street and
venture capital and EDOs (Economic Development Organizations). We are working with many MEPs and EDOs to
implement ideas such as those outlined above.
Author: Harry Moser, Founder and President, Reshoring
Initiative, harry.moser@reshorenow.org
[i] Sometimes called “insourcing”
[ii] This data and the TCO analytical tool are
from the Reshoring Initiative, a non-profit organization that provides the
tools and motivation for companies to more accurately assess their total cost
of offshoring. www.reshorenow.org
[iv] This data is from the Reshoring Initiative
based on analysis of 425 articles about reshoring.
[v] https://www.gov.uk/government/speeches/world-economic-forum-davos-2014-speech-by-david-cameron
[vii] http://www.bls.gov/emp/ep_chart_001.htm Before the Reshoring Initiative’s Sept. 18,
2012 meeting with the Labor Department, the page was headed “Education Pays.”
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