In recent times it’s very common to see stories about American companies scrambling to reshore manufacturing and leave China and the data seems to support this trend of reshoring or finding other locations. However, I suspect the American companies that moved to China for the wrong reasons originally are mainly the ones who are now reshoring back in the US.
Is this the case, though? Let’s explore this…
Which manufacturing should be reshored from China or kept in North America?
Here are some examples of productions that should be re-shored if possible. I believe the companies in these positions have off-shored for the wrong reasons…
- Any product with a short life cycle, and for which a 4-week boat trip makes no sense. Usually small and high-value items (e.g. an iPhone) can easily be sent by air, but a heavy or bulky item (e.g. a fridge, garden furniture…) cannot.
- When the total cost to make a product in the USA is 10 USD, and in China, it ends up being 8.5 USD, all the extra costs of China production tend to make offshoring uninteresting: quality risks and miscommunication, higher working capital needed, frequent trips by executives, slower and more complicated supply chain, loss of control, etc., not to mention the tendency of Chinese costs to rise quickly. This is more true for products with short life cycles and high quality requirements. I wrote about companies seeking to reshore manufacturing before here.
When it makes sense for an American company to retain production in China
Despite the current trend, there are some instances where, even today, it makes perfect sense for an American company to have some production in China. Here are some examples of the types of products that China is suitable for:
- Products that require a labor-intensive manufacturing process (e.g. complicated apparel such as jackets or bras, or a complicated electronic assembly that can’t be automated because the lifecycle of the product is too short or the volumes are not very high).
- Some products which can be made in large series with a highly automated process, but the lower-quantity & higher-mix orders need to come with a highly manual process. Such situations come up in many verticals: electronic products that are made with manual soldering because annual order quantity is not in the millions, construction parts that are welded manually, and so on.
- Products where inconsistent quality is acceptable (e.g. cheap shoes, giveaway toys, some promotional items, etc).
- Some products are sold in North America, in Australia, and increasingly in China. Importing them into China is sometimes lengthy and burdensome, therefore, setting up some production in China, and then moving all the production to China if things are working well, may make sense.
The PPE ‘black hole’ caused by offshoring manufacturing
A timely example of a product that should never have been offshored is face masks. They come with a high quality standard and might be needed urgently in an unforeseen manner (such as right now to fight COVID-19). I am not even mentioning the domestic security aspect of not controlling the production of these critical items.
As shown in this report, bottlenecks in the PPE supply chain caused partly by overwhelming global demand are not helped by the trade restrictions and distances involved when dealing with China, one of the chief exporters.
If PPE supply chains were to be reshored from China, some of these issues would be mitigated and Western countries would see their fights against coronavirus or other infections made easier. The equipment to make face masks in a fully-automated manner is not even that expensive in relative terms (as I am writing this, a line to make N95 masks is about 150,000 USD in China), so why offshore this?
It seems that the US government is taking note of this issue by tabling the Pandemic Production Act. Congresswoman Lori Trahan states:
“I think we would do ourselves a huge favor by directly investing in manufacturing to expand the production of PPE and medical technology, and at the same time investing in manufacturing jobs. So this is an opportunity for us to make sure we’re prepared for future pandemics, and it would be an unbelievable source of jobs to bring back to the U.S. to help stimulate the economy.”
If you’d like to hear more about reshoring manufacturing we discuss it, amongst other topics, in this episode of our podcast focused on how to prepare for a post-COVID world, too:
LinkedIn Comments about reshoring manufacturing back to the USA
Since publishing this post, a number of people have left interesting comments about how to reshore manufacturing, so I’ll add them, and my responses, here for reference as some good points are made:
Andrew Wilson says:
A: Totally agree about PPE being brought back [to the USA] and legislation will certainly be coming down the pipeline to assist with that. The same can be said for other strategic industries. As this article notes, the US govt. used to guarantee purchases is strategic materials back in the 50’s and can do so again. But I also feel that Mexico and central/Latin America will play a big role in high manual labor industries as well as key inputs in the consumer electronics and pharmaceuticals industry. Do you think this is possible Renaud?
R: Yes, possible. But very hard to replace China completely in some product categories (see above).
Keith Hoover also shared his thoughts. Here is our dialogue:
K: You assume that nothing changes here. That the manufacturing maturity level is stagnant and no new technology is available. Old thinking.
R: So, you mean that many products could be made in a different (and sometimes more cost-effective) manner in the USA, right?
K: Absolutely. Given the size and demand of the market, there is good incentive to upgrade.
R: Yes, true, there are nearly always solutions to cut costs markedly. Sometimes office people and other indirect labor contribute way too much to total cost. Sometimes the production processes (including sub-suppliers) are horrible and add unnecessary costs of all kinds. And sometimes smart process engineering can also be done and cut costs.
In my experience with Chinese factories, there is usually no need to invent new processes. Variable costs can often be slashed by 20-50% just by changing the organization.
K: Agreed on your points. But things are changing. Technology is being adopted in regions that used to rely on cheap, inefficient labor. And the capability maturity in apparel manufacturing here is… In need of improvement. So we can’t reshore until we have better models all around, from cost assessment to execution the factory floor.
Hongwei Shi mentioned the wider supply chain:
H: There is also an important factor, upstream key components and material suppliers can adapt and cooperate with this “come back. Otherwise, the manufacturing efficiency and flexibility of those products with frequent design updates and short life cycles will be significantly reduced.
R: True, especially if those components are customized (and likely to be unacceptable some of the time).
How about you? Are you in a position where you’re considering whether to reshore manufacturing? What has driven this decision?
Let us know by leaving a comment below, or contact me if you have any questions about making this work.