Nearshoring Has Potential, But All the Hype About Onshoring Is Nonsense

Editor’s Note: Jim Tompkins is CEO of Tompkins International.

I am always concerned with the paranoia that surrounds China manufacturing and the notion that manufacturing is coming back to the US. Here’s why.

The economic value of manufacturing, just like agriculture and every other sector, is not based on how many people are employed in the sector. Instead, it is based on the contribution from that sector to the country’s GDP and standard of living.

According to a recent Federal Reserve report, 88.5 percent of U.S. consumer spending is on American-made goods and services. Just 2.7 percent of the U.S. personal consumption expenditures go to Chinese-made goods and services.

In March of 2012, the ISM manufacturing index indicated expansion for the 32nd consecutive month. US manufacturers produce $3.4 trillion worth of goods annually, nearly three-quarters of which is consumed in the US. Moreover, the US exports $1.3 trillion worth of goods per year, mainly to Europe, Canada and Mexico; this is even further evidence of our robust manufacturing sector.

So not only is U.S. manufacturing doing fine, but competitiveness has actually been improving. True, many US factories have closed and a lot of jobs were lost. But the well-paying jobs were not lost to China. These jobs were casualties of automation and/or more efficient production methods right here in the US. In fact, manufacturing output today is up 8 percent over the pre-recession peak.

Those who dig into the facts soon discover that the US remains the world’s most productive large economy and the biggest market for sophisticated goods and services. And in turn, this stimulates innovation and attracts investment.

Despite the political avocation of “declinism” and concerns about the future, the US remains the world’s most competitive economy.

Why? It is driven by market forces. It rewards innovation. It protects intellectual property. It has trustworthy institutions that minimize corruption and cronyism. The economics of manufacturing will continue to evolve. And as oil prices increase, so too will transportation costs.

Therefore, it is likely that nearshoring will occur in several industries in which transportation costs are significant (appliances, machinery, furniture, fabricated metals, etc). In these cases, nearshoring may result in manufacturing returning to our hemisphere, but not to the U.S. Instead, manufacturing is more likely to go to Latin America.

If manufacturing does return to the US, it will not come as a result of transportation costs, but rather as a result of innovations in product design and/or process creativity that allow for higher levels of automation and productivity.

Contrary to what I have read and heard in some corners recently:

• Net manufacturing wages will not converge for US and China in year 2015.
• Companies are not treating outsourcing decisions lightly. I know of no companies making their outsourcing decisions based on wage rates.

We exist in a global economy with global supply chains. The world is interdependent. It is good when countries increase their standards of living, as this offers us all more consumers to buy our products.

It is beneficial when we export low paying jobs and replace them with higher paying jobs (per the well-known economic principle of “Creative Destruction”). This results in an increase in the quality of life for everyone globally when lower paying jobs are destroyed and higher paying jobs are created.

Whenever oil prices rise, there is a surge of articles suggesting that jobs that were moved offshore will return. It is clear that there may be considerable benefits from nearshoring in certain circumstances. These benefits include flexibility, agility, making things where you sell them, lead times, inventory, intellectual property protection, and energy costs.

As with all supply chain considerations – such as costs, customer requirements, competitive positioning and market shifts – sourcing is a decision that should be reviewed on a regular basis. I do see certain industries shifting production closer to the customer. And in the case of the US, this may drive some production to Latin America.

But there is no significant movement to onshore (bringing manufacturing from China back to the U.S). This topic may be interesting fodder for politicians and inexperienced business people to discuss, but when production leaves China, the huge majority will go to the next low-cost country. And it will not be the U.S.