Image credit: Scandic Sourcing
A growing number of Western companies are bringing manufacturing back to their home countries in a trend known as "reshoring”. Is this trend the beginning of the end of outsourced manufacturing in China?
Rising labor costs in China is making some American companies relocate on home soil. A survey conducted by the Boston Consulting Group in September 2014 showed a 20% increase in American businesses repatriating their businesses to the US or moving production from China to Mexico.
However the trend of reshoring is still very small and limited to certain industries. It has also become a media buzzword, with more anecdotal evidence to support it than factual. While it is true that the textile, garment and footwear industries are showing trends to be moving out of China to countries like Vietnam (where worker’s salaries are roughly a third of their Chinese counterparts), or at least that textile companies are developing a China +1 strategy, the trend of reshoring does not seem to apply to industrial production. According to a manufacturing survey made by the Boston Consulting Group in February 2012, a majority of producers of fabricated metal products, electronic and electrical equipment, computer parts, and industrial machinery are not planning to reshore their businesses.
80.000 manufacturing jobs reshored to the US in the past three years. However, the idea that manufacturing jobs in the West will have a big resurgence is far from realistic.
“The main reason China is still attractive for Western manufacturers is that there isn’t enough skilled labor back home, especially in heavy industry”, says Per Linden, CEO of Scandic Sourcing which consults Western businesses in China. “Skilled industrial labor such as engineers, machine operators and welders are still plentiful in China and the capacity for industrial production is enormous; the trend is not going to reverse in the foreseeable future”.
Most experts agree.
"It's taken 60 years for [offshoring] to happen, and it's going to take decades for it to reverse," says Harry Moser, the founder and president of the Reshoring Initiative who are actively lobbying for bringing manufacturing back to the US.
According to Moser, the phenomenon of reshoring can be overstated. "No one claims — at least we don't claim — that you're going to see a million new jobs from reshoring next year," Moser says. "That would be totally irrational, irresponsible. And we don't have the workers, the skilled workers, to do it”.
American manufacturing companies who have brought production back to US soil have experienced problems finding reliable staff workers who could pass drug tests, do basic math needed for the job, and show up on time the minimum wage, according to Forbes.
Another big reason to stay is China’s booming consumer market. With nearly 350 million people and growing in China’s middle class, the country is likely to be a company’s biggest target market over the next 20 years and that is reason alone to keep a foot in the door. Thus, even even textile companies that has much to gain by moving production to South East Asia keep production in China and develop +1 strategies rather than leaving China altogether.
A big reason why companies want to stay in China is ready access to the booming Chinese consumer market.
Per Linden concludes that the sheer output and access to skilled labor in China will be factors that will keep a lion’s share of the world’s industrial manufacturing in China. Thus, the future of Chinese manufacturing looks strong despite rising Chinese labor costs. “Even in China, skilled labor is highly sought after, so the trend will be more automated factories with higher efficiency and more streamlined flows requiring less labor”, Per Linden concludes, which will make Chinese factories even more competitive in the foreseeable future.