ASIA - In recent years major multinational Fast Moving Consumer Goods manufacturers have focused on Asian alternatives to production in China, in particular the ‘China Plus One’ policies particularly in Vietnam and Indonesia. There is a third alternative which is gaining traction in the USA and UK. It’s called Reshoring - the opposite of Offshoring - bringing production back home. However, it’s not without its problems, as Stuart Hoggard discusses.
Well it had to happen, didn’t it? For the past 20 years, the Big Idea for businesses in the West was Offshoring: opening factories, or commissioning products and services, to be manufactured, or performed, in cheaper overseas than at home. Usually this meant Asia, mainly China. The end product was then delivered to domestic consumer markets in Europe or the USA.
It seemed like quite a good idea at the time: cut the cost of manufacturing and/or back office services (such as call-centers) and deliver lower prices to customers.. At the same time entirely new consumer markets could be developed overseas from the trickle-down effect of the additional disposable incomes generated by workers in the source countries.
But it was all subject to the Law of Unintended Consequence - when a butterfly flaps its wings in an African jungle, it causes a hurricane and devastates the Mid Western housing market - and so, like many good ideas, it all went belly-up!
The Global Economic Crisis of 2008 effectively slashed consumer demand – the Baltic Dry Index (that keeps track of the total tonnage of dry goods being shipped by sea) hit zero in January 2009 - essentially no ships taking product from anywhere! It has been an uphill struggle since then.
Providing employment, directly or indirectly, to the Chinese has certainly put more money in consumer’s pockets. But now, the very Chinese consumers that Western companies have been nurturing are demanding higher salaries.
The average Chinese factory worker’s wage shot up by as much as 500% since the turn of the century. In line with the changing expectations of Chinese factory workers, the average annual urban income jumped to 41,799 yuan (US$6,850) in 2010, up from 24,721 yuan in 2007, according to the National Bureau of Statistics in Beijing, and this rise has continued unabated at an average of 20% a year for the past four years.
China's coastal provinces are losing their power to attract workers from the rural hinterland as factory fodder. With poor housing and little or no benefits, the migrant worker’s life is not a happy one: certainly they earn more than they could in the village, but as with all industrial revolutions most found that the city streets were not paved with gold.
Migrant workers usually return home during the Chinese New Year festival period. In previous years an average of 95% returned. This year only 85% came back.
Of course, even with these escalating labour costs -the average annual factory worker’s wage bill at US$8,000 - Chinese workers are still cheaper than their European counterpart, but the gap is closing: It would take a Chinese factory worker 2.5 years to equal the annual salary of a British minimum wage worker.
It’s not just the wage bill that is changing the game. The rising value of China's currency has a role; the RMB, has appreciated 25% versus the U.S. dollar in the past two years, and the cost of shipping goods from China around the world have also risen. It is starting to look like manufacturing in China is no longer a cheap deal.
In 2005, it was pretty common for landed cost from China to be 25-30% less than the cost of manufacturing in the United States, but now two-thirds of that gap has closed.
According to the Boston Consulting Group, which has published a series of papers on reshoring, the ongoing trends could "virtually close the price gap" for most products sold in the US in a couple of years. A similar argument can be made for Europe.
"Within five years, the total cost of production for many products will be only about 10-15% less in Chinese coastal cities than in some parts of the US where factories are likely to be built,” noted the Boston Consulting Group.
“Factor in shipping, inventory costs and other considerations, and - for many goods destined for the North American market - the cost gap between sourcing in China and manufacturing in the US will be minimal.”
Now the Next Big Idea is Reshoring: Bringing the jobs back home is the political spin given to what in reality is the quest for cheaper production with shorter supply chains.
Both the UK and US governments have Resourcing initiatives: The UK Government itself has launched a new advisory service called Reshore UK.
Research from the Confederation of British Industry (CBI) found that almost 25% of UK companies with offshore operations would reshore some in the next three years, while the Engineering Employers Federation (EEF) suggests that reshoring is accelerating. Correspondingly PwC sees potential for the creation or repatriation of 200,000 jobs in the UK over the next decade.
In the US, Boston Consulting Group surveyed 106 companies with annual sales of US$1 billion or more and found that 37% planned to reshore or were "actively considering" it. Of the biggest firms with sales above $10 billion, 48% came out as potential reshorers.
Quite apart from the PR and political capital to be gained, some of the arguments are genuinely compelling: General Electric Co (GE) opted to reshore some production from China to its Appliance Park in Louisville, Kentucky in 2012. This enabled GE to redesign one of its water heaters and slash the time it takes to get them to market.
Efficiency rose and material costs fell by more than 20%, and GE was able to reduce the US retail price of its heaters by US$300.
Last year, Wal-Mart pledged last year to buy an additional US$250 billion in US-made goods over the next decade. And when Wal-Mart calls, the entire supply-chain jumps through hoops – remember how the Wal-Mart ‘Scorecard’ is regarded as a de-facto environmental regulation in the US.
But after a year of trying, it appears that suppliers trying to Reshore production to meet the world's largest retailer’s initiative are running into practical problems as they try return manufacturing to the US since a lot of the tribal knowledge and skill sets are gone because the humans who used to do that work have either retired or died.
Trying to rebuild that manufacturing capability, while making products that meet Wal-Mart's standards, can require companies to “start from scratch,” says a Washington Post report.
Even then, despite the initiative, Wal-Mart’s China-produced inventory is expected to hit US$18 billion for 2014, keeping the annual growth rate of over 20% consistent over two years. Last year, the firm bought US$15 billion products from China - half from direct purchasing, the other from the firm's suppliers in China.
So, as logical and laudable as it may seem, the question now is this: after more than 20 years of Offshoring does the capability exist to manufacture?
Manufacturers on both sides of the Atlantic are confronted with shallow pool of component suppliers, an inexperienced workforce requiring retraining, and other infrastructure problems that developed during the long industrial decline.
Or is it already too late? Have the skillsets gone for good, like those in the Clyde shipyards, Ravenscraig steel works or the Durham mines.
And let’s not forget, Chinese domestic demand is still growing at 8-10% a year. So even if the multinationals decide to Reshore production, it’s not as though they will withdraw from China their export but simply convert their plants, and re-tool them to focus on Chinese consumption.
See related stories:
- Indonesia's increasingly sophisticated consumer demand
- Vietnam: a low cost high productive production base