Rebuilding and Reshoring: Conclusion
The United States has been the leading economic, technological, and military power since WWII, but today the country faces the increased threat of China’s growing global influence. At the same time, there are challenges here at home, including a skilled workforce gap, low productivity growth, an overvalued dollar, and a massive trade deficit that must be addressed. A stronger manufacturing sector is critical for the United States to solve these challenges by providing good wages, advanced manufacturing technology, tax revenue, unparalleled defense material, and confidence in our future.
In this series conclusion, I summarize the actions needed to secure U.S. leadership in innovation and manufacturing, bolster competitiveness, and strengthen economic and national security. Rebuilding the United States supply chain starts now.
Growing U.S. manufacturing
Reestablishing domestic supply chains requires growing manufacturing, which requires reshoring. At a constant level of goods consumption, the only way to grow manufacturing is by exporting more or importing less. As we have shown, in an earlier article from this series, importing less, i.e., reshoring, is far easier.
That’s not to say we should discontinue efforts to expand overseas markets for American products. However, sourcing domestically avoids the approximately 15% in cost or “friction” associated with importing or exporting. U.S. products are, on average, about 30% more competitive here vs. imports, as opposed to when we export to an overseas market like Asia.
Key factors for manufacturing strength
Four actions are essential for success.
- Build the Skilled Workforce: Develop a skilled workforce with the quality and quantity similar to Germany. German wages are comparable to U.S. wages, but Germany has a trade surplus of 5% of GDP vs. the U.S. trade deficit of almost 4%. German skilled trades and engineering are the key difference. It is essential that the United States have a sufficient number of workers with the skill-level necessary to provide the 40% capacity increase and to use the most modern equipment to achieve the required cost competitiveness and quality. This factor is the sine qua non of reshoring and rebuilding.
- Increase Productivity: U.S. productivity growth has averaged less than 1% per year for 10 years vs. China’s 6%. To become competitive and provide the wage and tech level required to attract the needed workforce, we need significant investments in automation and workforce by manufacturers and government.
- Ensure a competitive U.S. dollar: The U.S. dollar is 20 - 30% overvalued. Having the reserve currency is a blessing for cheap debt but a curse for manufacturing.
- Use Total Cost of Ownership (TCO): If all companies and governments sourced using TCO instead of FOB price or “landed cost”, about 20% of imports would be replaced with domestically produced goods, increasing U.S. manufacturing by 20% and cutting the trade deficit by 50%.
These factors reinforce each other. A lower U.S. dollar makes manufacturing more competitive, increases work at factories enabling investment, and improves recruiting. Productivity enables higher wages and exciting, advanced technology jobs. TCO helps companies see that the cost difference between domestic and imported goods is small enough to provide a high return on investment when reshoring.
The COVID-19 pandemic revealed brittle, hyper-connected global supply chains. Companies with local supply chains fared better against the disruption. The vulnerabilities from 40 years of hollowing out U.S. manufacturing and the resulting over-dependence on imports were exposed. Americans are now especially aware of our over-dependence on imports of medical products and pharmaceuticals.
New tariffs and the COVID-19 crisis caused supply-chain disruptions of national security-sensitive and critical components, like semiconductor chips — used in everything from computer, automotive, and electronics manufacturing, critical military and defense technology, and everyday consumer products like smartphones, televisions, and washing machines. The time is right for companies to adapt to a world in which heavy dependence on worldwide supply chains is no longer the key to profitability, much less survival. The Reshoring Initiative’s resources can help you prepare.
Setting a goal for success
Eliminating the $900 billion trade deficit will result in a 40% increase in manufacturing, engaging five million more manufacturing employees. The United States needs to double or triple the current 150,000 jobs per year rate of reshoring and foreign direct investment (FDI) to achieve the goal in 20 to 30 years.
All segments of society must reengage, including government, educators, consumers, OEMs, contract manufacturers, technology suppliers, retailers, and communities. Companies must rethink sourcing metrics by universal and consistent use of TCO instead of FOB or FCA price or landed cost. Implementing an aggressive industrial policy, driving innovation, and aligning education and training with “new collar” jobs is central to global competitiveness.
Benefits of reshoring
Growing U.S. manufacturing and boosting competitiveness will produce societal, environmental, and economic success. Reshoring will bring to urban communities well-paying jobs and reintroduce good job opportunities into rural areas. Both are critical factors in achieving economic equity. Manufacturing goods far away from their ultimate sale-and-use location results in commensurately higher transportation-related emissions. Less shipping reduces the global quantity and types of packaging and its associated waste. Increasing well-paying manufacturing jobs in the United States can be a critical factor in supporting recovery from COVID-19 pandemic-induced unemployment. More tax revenue from greater economic activity will help offset spending on stimulus programs and reduce budget deficits.
TCO: Quantifying relevant factors and costs
Localization (producing near the consumer) often reduces total cost by shortening supply chains and contributing to a lean and agile strategy. The savings on non-manufacturing costs as a result of producing in the market in which the products will be sold can often overcome a 15-20% manufacturing cost gap caused by an 80% wage gap. Using TCO instead of manufacturing cost or FOB price when making siting and sourcing decisions is the best way to recognize these savings. (See TCO Part 1 and Part 2)
The Reshoring Initiative’s TCO Estimator is a free online tool that helps companies account for all relevant factors to compare the true total cost of domestic and offshore sourcing and factory siting. Using the TCO metric, companies can uncover the easily ignored hidden costs and risks of offshoring, reducing the apparent competitiveness gap. Minimizing costs with sustainable lean strategies, product optimization, and automation further reduces the gap, enabling companies to unleash the power of “local for local.”
When you find yourself competing with a lower-priced offshore product, we suggest offering to help the customer compare the TCO of your price offer vs. the lower-priced offshore offer. We suggest starting with the offshore-sourced product(s) that are causing the customer problems such as delivery, quality, IP, inventory, lost orders, travel, and so on.
Skilled workforce development and U.S. competitiveness
Skilled workforce development is one competitiveness factor over which we can have complete control.
Training for new-collar jobs
As manufacturers increase competitiveness with automation and other digital technologies, the workforce will need comprehensive training and corresponding skills to interact and grow. Rapidly changing technologies demand that new-collar workers develop skills through nontraditional educational paths, including community colleges, vocational schools, software boot camps, technical certification programs, high-school technical education, on-the-job apprenticeships, and internships, as opposed to a four-year university degree. Manufacturers must incorporate lifelong learning into their business plans to develop the future workforce and keep up with developing technologies.
Workforce development solutions
We recommend creating a strong K-12 education focused on math and science as well as offering “vocational” (or, as we prefer to say, “professional”) programs in all high schools. Tactics to help:
- Coordinate with businesses to generate internships.
- Encourage STEM studies and programs that prepare young people for advanced manufacturing careers that require high-tech skills, such as programming, engineering, and digital competencies.
- Work closely with local manufacturers to develop needed skills.
- Develop a workforce that has the skillsets to operate, maintain, and repair the automated equipment that will power new production processes.
It’s imperative that the government, industry, and academia come up with ways to recruit above-average high school students to manufacturing, and convince more smart high school students to choose apprenticeships instead of four-year university degrees. The Reshoring Initiative supports: industry-recognized credentials, notably credentials by NIMS for our industry’s key, in-demand functions; CTE program development; and AMT – the Association for Manufacturing Technology’s Manufacturing Mandate. The JOBS Act bill currently in Congress would make federal financial aid available for skills training.
Reevaluate and Reengage
Although there are continuing concerns regarding China’s industrial policies, the United States has limited control over China’s initiatives. However, we have unlimited control over our competitiveness initiatives and our ability to achieve our ambitions. Let’s collaborate to support American competitiveness and rebuild a U.S. manufacturing powerhouse.
I would like to thank the folks at AMT and the IMTS community for the opportunity to explore reshoring in depth. I want to especially thank Sandy Montalbano, consultant to the Reshoring Initiative, for her key role in producing this series. Rebuilding the U.S. supply chain starts now.
About the Author
Harry founded the Reshoring Initiative to bring five million manufacturing jobs back to the U.S. after working for high end machine tool supplier GF AgieCharmilles, starting as President in 1985 and retiring 12/31/10 as Chairman Emeritus. Largely due to the success of the Reshoring Initiative, Harry was inducted into the Industry Week Manufacturing Hall of Fame 2010 and was named Quality Magazine’s 2012 Quality Professional of the year and FAB Shop Magazine’s Manufacturing Person of the year. Harry participated actively in President Obama’s 1/11/12 Insourcing Forum at the White House, won The Economist debate on outsourcing and offshoring, received the Manufacturing Leadership Council’s Industry Advocacy Award in 2014 and the Made in America 2019 Reshoring Award. He was recognized by Sue Helper, then Commerce Department Chief Economist, as the driving force in founding the reshoring trend and named to the Commerce Department Investment Advisory Council in August 2019.
Harry is frequently quoted in the Wall Street Journal, NYT, Forbes, Financial Times, New Yorker, Washington Post and USA Today and seen on Fox Business, MarketWatch, PRI, NPR, Manufacturing Talk Radio and other national TV and radio programs. He received a BS in Mechanical Engineering and an MS in Engineering at MIT in 1967 and an MBA from U. of Chicago in 1981.