Rebuilding and Reshoring: How Competitive is U.S. Manufacturing?
Category: Supply Chain • May 13, 2021
By Harry Moser, Founder/President, Reshoring Initiative®
U.S. manufacturing output and employment would be 40% higher if we did not have a trade deficit. High U.S. manufacturing cost is the driving force behind the trade deficit. For many products, the FOB (Free On Board) price has been 20% higher than in other developed countries, and 40% higher than in developing countries. U.S. factories have not been competitive, so companies sourced offshore to meet consumer and industrial demand for low-priced goods.
In principle, companies outsource and locate facilities based on a combination of price, quality and delivery. In practice, the delivery and quality from offshore have apparently been adequate in a broad range of products, so the decision is primarily based on price.
In 2017, the Reshoring Initiative and leading auditing and consulting firm, Plante Moran, surveyed manufacturers and distributors, asking how much they sourced offshore and why. More than half of the respondents indicated that price was the driving factor in the offshoring decision, Figure 1. Many others named factors indirectly driven by price. Taken together, that’s about 70-80% of offshoring decisions based on price. The result is an industry hollowed out by offshoring. Many products, some critical to public health and national security, are no longer produced in the United States.
Price Drives Offshoring
The survey’s findings regarding the U.S. price disadvantages are sobering. About 50% of what the companies were importing was priced 40% or more below the corresponding U.S. price, Figure 2. The good news is that about 30% of the imports are priced within 30% of the U.S. price. Recovering this 30% would balance the goods trade deficit and increase U.S. manufacturing by about 40%. Subsequent articles will show how.
Direct Material $’s Offshored by % of North American Price
Users of the Reshoring Initiative’s Total Cost of Ownership (TCO) Estimator provide an even more detailed view of price differences. Figure 3 shows the ratio of Chinese FOB price to U.S. FOB price for 180 products, covering a broad range of goods. The mode, the high point of the distribution, is around 70%. Again, 30- 40% of the cases are within 30% of the U.S. price.
The United States is more price competitive vs. Europe, but still lags. Figure 4 shows the mean (the arithmetic average) and the median (the midpoint in the data) for the two regions.
The Economist maintains an index of the price of Big Macs in most countries, primarily to measure, in a light-hearted but relatable way, the under-or over-valuation of currencies. The advantage of the Index is that the product is available, with consistent specifications, in almost all countries. The January 2020 Index (Figure 5) shows the U.S. Big Mac price about 20% higher than in the Euro Area and 40% higher than in most developing countries, largely consistent with our data on manufactured goods. The U.S. price was 60% higher than in China.
It is possible to overcome some price disadvantage via factors such as quality and delivery. European quality has been consistently high. Chinese quality is improving. Chinese delivery, including shipping time, is often better than U.S. delivery for complex one-off products, such as injection molds. U.S. firms could gain advantage by aggressive investment in automation and by implementing delivery-improving tools, such as lean and QRM (Quick Response Manufacturing).
Consultants such as BCG (Boston Consulting Group) and Deloitte periodically release indexes showing that the United States is the most competitive country or is number two and will be number one in a few years. The Deloitte index includes factors, such as technical universities, legal systems, and infrastructure, that might influence cost but are not based primarily on cost itself. The BCG index shows the China cost as only 5% lower than U.S. cost. That’s Impossible, given our trade imbalance. Despite the optimistic studies, the U.S. goods trade deficit is stuck at approximately $800 billion/year. We have a goods trade deficit with nine of our top 10 trading partners, not just with China. The only U.S. surplus is with the U.K., long past its peak industrial years. The macro numbers confirm the lack of U.S. competitiveness.
High U.S. prices are driven by a range of factors, most notably an overvalued U.S. dollar, and inadequate investment in equipment and workforce. The impact of high actual U.S. prices is compounded by myopic corporate perceptions of price. Most companies source based on the FOB price instead of TCO, thereby ignoring 15 to 25% of relevant costs and risks. Subsequent articles in this series will detail how companies can improve their perception of price by using the TCO Estimator. I urge our government leaders to try to act to level the playing field for U.S. manufacturers and reduce our actual price disadvantage.