The Viability of Reshoring Manufacturing to the U.S.

Understanding the 360-degree view of your fully-loaded production costs is the first step to evaluating whether reshoring your manufacturing is going to net out.

There has been much reporting done on the “trade war” with China; that this is America’s chance to bring manufacturing back to the U.S. Though tariffs and protectionism may seem like an enticing case for “reshoring”, the arguments are often overly simplified, interlaced with nostalgia for postwar U.S. manufacturing dominance and its trickle-down economic growth. Tariffs can disappear as quickly as they appear, so we suggest that reshoring decisions be based on fundamental factors that are likely to remain consistent for the longer term. 

Understanding the 360-degree view of your fully-loaded production costs is the first step to evaluating whether reshoring your manufacturing is going to net out. We live in the age of the subassembly, as such, viability of moving one portion of your production requires deep knowledge of how interdependent your ecosystem of suppliers, supply chains and related logistics is. Discovering, documenting, and ultimately duplicating these relationships can make reshoring a much larger task than simply moving a product line from one country to another.

Once your insights are current, it’s time to confront the elephant in the room: Do you actually have sufficient scale to afford the reshoring costs? Reshoring is ultimately a long-range bet on the value of a high-skill workforce in tandem with best-in-class automation. Of course, automation NREs (non-recurring engineering costs) are expensive and can take multiple seasons to see ROI. Have you run your reshoring plan against financial risk models forecasting future FX rates, labor rates, materials costs, energy costs, depreciation, taxation and interest rates? Surprisingly, we find that many firms do not go broad enough on considering all the factors relevant in offshoring and reshoring decisions, even if a set of those factors is what led them to go offshore in the first place.

Despite the precedent of low labor costs in China, this actually is a rapidly diminishing factor. Manufacturing salaries in China have tripled in the last decade and skilled manufacturing engineer salaries are approaching 50 percent of U.S. based engineers of the same level. Real estate costs per square foot in central Shenzhen now exceed prices in San Francisco. In fact, China is now officially recommending domestic manufacturers offshore labor-intensive operations to lower-cost labor zones in Southeast Asia and Africa.

If cheap Chinese labor soon won’t offset increased costs related to QC, logistics, and operational complexities, why not reshore back to the U.S. and automate your manufacturing? Indeed, the prevalence of top-tier equipment and service vendors in the U.S. and Europe can make automation practical, though certainly not without a big up-front investment. The U.S. has far cheaper energy and net logistics costs are often cheaper than China, making reshoring particularly suited to: large production volumes, bulky or heavy products, energy-intensive manufacturing, highly variable demand, special logistics requirements, products requiring frequent updates or heavy customization, and products with strong intellectual property concerns.  

But perhaps the biggest impediment in fulfilling the reshoring ambition is the acute shortage of skilled manufacturing engineers to design and build the automations that drive the modern factory. This includes not just university degree engineers, but also technicians, tooling and product specialists that gain skills through vocational schools and work experience. Tim Cook of Apple has mentioned numerous times that he would love to bring more Apple manufacturing back to the U.S., but there are not enough manufacturing engineers in the U.S., even just to cover Apple.  

Through decades of consumer goods market dominance, China has groomed orders of magnitude more engineers with T-shaped skill sets that combine craftsmanship, robotics and computer science. Those same engineers have often cut their teeth working in smaller shops, for smaller clients, creating the highly-lateral web of relationships that created a relatively stable environment for supply chains. By contrast, domestic manufacturing in the U.S. has been compelled to focus its outreach efforts on highly-specialized, and by extension high-cost, markets such as medical and aerospace. Because both public agencies and private businesses wind up tuning their operations to fit these specializations, U.S. contract manufacturers are often excessively constrained by legal, liability, and compliance issues that reinforce pessimistic cost modeling, making domestic contract manufacturing more expensive, less responsive and ultimately less competitive.

In contrast, China is an incredibly easy place for an entrepreneur to onboard vendors and realize their vision, despite language and cultural differences. This has little to do with labor costs, but rather, the diverse ecosystems of designers, suppliers and makers, the ease of doing business, fast turnaround times, the positive attitudes, flexibility, customer focus and competitiveness at all levels, which combine to make a place like Shenzhen compelling for the entrepreneur. To illustrate: Co-author Gustavo recently designed a subassembly for use in an IoT industrial sensor, with every intention of manufacturing it in the USA, but needed a limited run of 20 prototypes for testing and needed them quickly. Attempting to manufacture quick-turn prototypes in California, the quotes averaged 6 to 8 weeks of lead time and almost $10,000 per prototype. Disappointed, Gustavo flew to Shenzhen, paid $1600 up front to a local “tier 2” contract manufacturer, walked through the design in person, then returned in 2 days to retrieve his prototypes at a final cost of $80 each, with a handshake commitment to have larger batches produced when ready. He paid $2,700, about 10 percent of what it cost domestically, to get FCC compliance testing completed later in the week and was back in California by the weekend. In the U.S., in that first week, the lawyers would still be redlining the contract.

Certainly, the U.S. has tremendous reshoring potential and several competitive attributes, however, these factors will remain throttled so long as we have an acute shortage of manufacturing engineering talent forcing the market for those skills into increasingly niche verticals. Automation-driven manufacturing can certainly help with this. To take things to the next level, though, the most important groundwork may be laid by finding ways to attract more students to pursue manufacturing engineering, which is to say that culturally, we need to make domestic manufacturing “cool” again—a source of credibility, prestige and career pride.     

This may even come about organically, as the next generation of manufacturing tech has little opportunity for low-skilled workers, whose role will be increasingly replaced by general-purpose machinery, and instead cultivates a “best and brightest” mindset for creative solutions. Optimistically, with the merger of aerospace practices with best-in-class tooling and applied to the making of tangible consumer goods that touch lives, we might actually have a shot at reshoring after all.

Carter Smyth is CTO and Practice Manager & Gustavo Huber is IoT Practice Lead at Silicon Valley Software Group

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