Tuesday, August 12, 2014

The Reshoring Initiative's Recommendations for the Federal Government

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

% Change
Feasible 2016
New offshoring *
- 70%
New reshoring
+ 1,500 %
Net reshoring
        *Estimated / ** Calculated


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
[vi][vi] Ibid.
[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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