Reshoring of Manufacturing

02/21/2014 05:39 EST | Updated 04/23/2014 05:59 EDT

The last few decades have been characterized by the emergence of rapid industrialization in the emerging economies. Countries like China and Brazil have improved their industrial base and increased the size of their economies. Multinational companies moved their production plants from developed countries to offshore destinations in developing countries to reduce their manufacturing costs and boost profits. Recently, however, some manufacturing units have been relocating back to the developed countries as these countries are once again looking attractive as manufacturing destinations. This relocation termed as 'reshoring' is expected to gain momentum in the future.

The reason manufacturing was offshored was to move production from high labor cost destinations (developed countries) to low labor cost destinations (developing countries). Using the offshoring strategy, manufacturing companies could take advantage of the lower labour costs in developing countries and reduce their costs while increasing their profits.

China, undoubtedly, has benefited most from offshoring. According to McKinsey Global Institute, manufacturing contributes 33 per cent of GDP in China while in the U.S., manufacturing has decreased from 25 per cent of U.S. employment in 1950 to the current 9 per cent. However, expansion of manufacturing has led to increase in wages in coastal regions in China and other offshore locations. At the same time, wages have stagnated or decreased in advanced economies. Again, natural calamities like the Japanese tsunami and the floods in Thailand have demonstrated the vulnerability of global supply chains. This has led some U.S. companies to move production back to the U.S.; they have restarted reshoring of production of computers and washing machines, according to McKinsey.

According to McKinsey Global Institute, manufacturing has a bright future and would expand in the advanced economies but in a different way. High-value added production will increase in the advanced economies. At the same time, manufacturing is expected to increase in both low-income countries and middle-income countries. In the manufacturing sector, there are certain industries that are reliant on low-cost labour. It is the low-cost labour that makes these industries competitive and viable. Industries like textiles, apparel, toys and electronics assembly belong to this low-cost labor group. The jobs in these industries are the most globally tradeable and relocate to the areas that offer low wages of workers. Countries like Bangladesh, Vietnam and Cambodia have used their low-cost labor to become significant manufacturers in these types of industries. All the three countries are major textile and apparel producers and are expected to continue expanding these low-cost labor industries in their economies.

There are some industries for which proximity to demand is very important. Automobile manufacturing is an industry where this characteristic is very important. For that reason, companies like General Motors have opened plants in Asia where demand for automobiles is increasing. It is predicted that these types of industries will expand their manufacturing capacities in locations where demand is generated. Therefore, manufacturing employment in these countries that are usually middle-income countries is forecasted to increase. Countries like Brazil, India and China are expected to benefit in terms of employment from this type of manufacturing.

It is predicted that manufacturing will have a positive impact on employment in the advanced economies. As the fiscal incentives are readjusted in the U.S. so as not to favour companies which opt for offshoring and give incentives to companies which produce in the U.S., the manufacturing companies may reshore some of the production. It may be more financially lucrative to manufacture in the U.S. than in the emerging economies. This may increase manufacturing's contribution in the U.S. economy as well as increase employment.

Due to the relatively high labour cost, advanced economies have experienced most of their manufacturing job losses in labor-intensive industries. Even though they have a trade deficit in labor-intensive goods, advanced economies run a US$726 billion surplus in industries that require continuous innovation, according to McKinsey Global Institute. Industries like pharmaceuticals and machinery fall within this group. Global manufacturing value stood at US$7.5 trillion in 2010 while more than 1.8-billion people are predicted to join the middle class by 2025. This shows the enormous opportunities available to the manufacturing companies, including those in the advanced economies.

There are some manufacturing industries that require significant innovation and high-tech factories. Industries that use carbon fibre and nanomaterials are high-tech industries that also require highly skilled workers. Again, 3D printing is increasingly becoming popular, moving from a design tool to a means of production, according to McKinsey. All these industries are predicted to improve research and development, and the creation of new products. The high-tech factories would employ highly skilled workers who are mostly available in advanced economies. Due to improvements in technology and productivity, fewer workers may be required in these industries. However, there would still be demand for highly skilled workers. This is predicted to increase manufacturing employment in the advanced economies.

High labour productivity and competitive wages is making it increasingly economically feasible to manufacture in the United States. Backed by popular support to increase employment, reshoring is increasingly gaining momentum. Besides reshoring, there are five game changers for the U.S. economy as identified by McKinsey Global Institute. These are energy (shale gas exploration), trade, using digital information to raise productivity, improving infrastructure and human capital. Each of these game changers can increase U.S. GDP by at least $150 billion by 2020 while the potential may reach trillions of dollars. Again, the effect on employment would be remarkable. Energy, infrastructure and trade can each increase employment by 1.5 million.

Overall, manufacturing activity is expected to increase in the future due to a rise in the middle class all over the world. This will have a positive impact on employment in both developing and developed countries. High-tech manufacturing that require high skills level would employ more people in advanced economies. This would increase overall employment in the advanced economies.