#482. 2014 Trends That Excite Agracel – Trend 2: Reshoring Manufacturing to the USA

Posted on | The Agurban

This week, we continue with our series on trends that excite us here at Agracel about our future. Last week we touched on European manufacturing firms moving to the USA. This week, we will discuss reshoring, which is when American manufacturers bring production back to the USA from Asia, mostly China.

Trend 2:  Reshoring Manufacturing to the USA

We’ve closely followed a number of American firms bringing manufacturing back to the USA from Asia, mostly China. While Agracel has not landed any of these projects yet, we have aspirations to do so.
Examples of firms that reshored production back to the USA from China in the past year include: Apple (computers); Electrolux (appliances); Foxconn (LCD TVs); GE (appliances); Google (phones); Lenovo (PCs); NCR (ATMs); and Whirlpool (appliances).
A BCG survey of U. S. based manufacturing executives in September 2013 showed that 54% planned to reshore production compared to 37% in a 2012 survey. Their three main reasons for doing so were:

1. Labor costs (cited by 43% of responders)
2. Proximity to customers (35 percent)
3. Product quality (34 percent)

A Grant Thorton survey in early 2014 found that more than 1 in 3 U.S. firms planned to bring material and components production back to this country within the next twelve months. With over 20% of this production currently outsourced overseas, even a small shift would be significant for American production.

An increasing number of manufacturing executives are becoming disillusioned with the many challenges of producing in China. In addition to the lack of transparency, quality issues, and intellectual property theft, the productivity of Chinese workers is significantly lagging that of developed countries. Consider that it takes over 100 million Chinese to produce an amount equal to what the USA produces with only 12 million. In 2012 the average American worker produced $166,000 of output compared to $26,000 in China.

And, while there are many who continue to feel that China will dominate us in the long term, we are reminded that in the 80s that was the common sentiment for Japan. We are more of a doubter as to whether this will come to pass for China. We see a developing weakness, especially in the past couple of years. In 2009, four of the largest ten firms in the world were Chinese, with three from the USA. However, in 2013, nine of the top ten firms are American, with only PetroChina still in that top 10. Investors around the world have learned the painful lesson that “state directed” can become “state interference” over a period of time.

In 2013, we saw continuing signs of general discontent in China, with the show trial of Bo Xilai, once considered in the running for China’s top position. The revelations of the opulence of he and other Chinese princelings during this trial were an eye-opener. This crackdown and other growing problems in China have more of its wealthy looking at greener pastures elsewhere. A January 2014 survey by Huron, a Chinese wealth research firm, found that 64% of Chinese millionaires had either already emigrated or planned to do so, with the USA as their favorite destination. The three main reasons given for leaving were: a better education for their children, health concerns due to increasing pollution, and overcrowding. Separate studies estimate that from $450 billion to $660 billion has already been stashed overseas by wealthy Chinese.

An interesting side note on the differences between China and this country is in the influence of money in politics, something that we all hear a great deal about. Our media likes to occasionally point out the incredible wealth of Congressmen, recently reporting that slightly over one-half are millionaires. When you look at the wealth of the top 50 in Congress it totals $1.6 billion. But, compare that to China, where the top 50 members of the National People’s Congress have a combined net worth of $95 billion, sixty times more! Think about that!

We will continue our Trends series next we as we look at the Longer Term Impact for American Manufacturing. Some sectors of the manufacturing industry will see changes sooner than others.