This is the first post in a two-part series on the “Changing Face of Manufacturing.” We have many manufacturing shipper customers, and we love to create content of value for them on such subjects as best practices in logistics or trends around the supply chain. However, we don’t only talk about what we do well, we also like to talk about things that may affect manufacturing companies so we can be the maven to resources which are of value to our customers and the industry at large. This series’s aim is to educate on what we see coming down the pipeline in the world of manufacturing. This first post looks at some of the reasons driving reshoring and other factors affecting manufacturing. Tomorrow, we will do more of the top areas or trends for manufacturers to look out for in 2015.
Changing Face of Manufacturing: How and Why US Manufacturing Companies are Looking at Reshoring
The current market trends indicate that the manufacturing industries are poised to reshore back to the United States in a big way. Already, the US is looking as attractive as Mexico to manufacturers and is likely to match China in attractiveness in the near future, according to the MAPI Foundation, which produces in-depth economic reports widely read by the press, government official and the business community. Although offshoring is still going on, about an equal number of companies are reshoring. Manufacturers, who had deserted US soil in search of cheaper labor and lower taxes are increasingly looking at home.
SEE ALSO: Reshoring Optimism, But Not Much Else (a hard look at the numbers reveals, although there is optimism about widespread reshoring, there is still more work to do. What…a negative link about reshoring in a post about reshoring? Remember, realism & optimism breed sustainability!)
The situation is very different from a decade ago when a large number of manufacturers, both big and small, had either already moved their manufacturing plants offshore or were in the process of moving. The future trend increasingly looks like they will be “homeward bound”. There are several reasons behind this. Growth drivers in domestic manufacturing include a sharp fall in the price of crude oil and natural gas, rising costs of labor in China and other host countries, and favorable conditions for manufacturing back home.
Drop in the price of crude oil
With the rise in global crude oil production and relative political stability in the major oil producing nations, particularly Iraq and Libya, the price of crude oil has fallen from above $100 a barrel to around $50 a barrel in just a year. Unless a drastic development takes , such as another war in the Middle East or a drastic cut in oil production by OPEC, the price of crude oil is likely to fall even lower or stabilize at this level for the foreseeable future. While this is bad news for oil producers, it is good news for US manufacturers who will see a significant fall in the cost of manufacturing and transportation. The lower cost of production will lure a lot of manufacturers back to the US or at least encourage them to invest in manufacturing plants domestically. At the same time, oil prices are not expected to fall so low as to cause a complete collapse of the investment in US oilfields.
Fall in the price of natural gas
In July 2007, the price of natural gas rose to an astronomical $14 per MMBtu. The only time it was higher was in December 2005, when it had briefly crossed $15. Since then, it has taken a big tumble and remained below $5 for the most part. With the rise in the production of natural gas in the US, its price is expected to continue its downward slide and experts are already talking about $1 gas within a few years. Unless the source of natural gas dries up, which is not likely for many years to come, the price of gas is likely to remain low for the foreseeable future. This is highly encouraging for US manufacturers since a significant number of US industries depend on natural gas, whether directly or indirectly. With the price of natural gas at its historical low, it is only natural that many manufacturers will find it advantageous to shift back to the US.
Rising costs of labor in China and other places
Starting from the early 1990s, North American and European manufacturers made a beeline to set up factories in China, India, Vietnam and other Asian and African countries where labor was dirt-cheap and the cash-strapped governments of those countries were more than welcoming. But things have changed a bit since then. As those countries have grown richer, labor costs have risen and will continue to rise. China saw an increase of 10% last year. Add to that the cost of shipping over long distances to US and European markets and they have lost the huge advantage they used to have in the past. In view of this, manufacturing products in the US have become more economical, at least for the consumption of the domestic market.
With an increasing number of foreign-based US manufacturers looking homeward, the future of manufacturing is already looking upbeat in the US. The data published by MAPI in December 2014 shows that industrial production increased at an annual rate of 3.9% in the third quarter of 2014 and is expected to grow by 3.5% in 2015, 3.9% in 2016 and 3.1% in 2017. Of course, not all manufacturers will return home since poorer countries will continue to have lower labor costs. However, industries that depend on natural gas, such as metal and chemical manufacturers, will have more to gain by reshoring than continuing to stay where they are.