Industry Insights

28 August, 2012

A number of American manufacturing companies which had previously outsourced operations to China, India, Mexico and other countries in an effort to lower costs are beginning to rethink their sourcing strategies, finding that production can be better supported by facilities in the U.S.

Reuters reported on this shift in the case of Seesmart Inc., a lighting company in California. Seesmart once made all of its LED products in China, but has begun moving production back to the U.S., citing reasons such as slow, expensive shipping and the desire for more control over warehouses and assembly lines. According to a company executive, the move is cutting Seesmart’s logistics costs by about 30%, as it no longer has to fly its products across the Pacific.

The example is representative of a broader “reshoring” trend in the country involving larger manufacturers such as Master Lock, General Electric Co. and Caterpillar Inc., all of which have expanded production in the U.S.

Higher transportation and shipping costs as well as higher wages in emerging markets are among the key drivers. At the front of the queue back to production in the U.S. are large, heavy items that are more costly to ship. General Electric has shifted appliance production from Mexico and China to Kentucky. Likewise Caterpillar, the world's leading manufacturer of construction and other heavy equipment, is building a new plant in Georgia to manufacture bulldozers and excavators.

Higher wages in the U.S. are not a major concern, as wages now comprise only a fraction of total operating costs. Factories are much more automated, allowing manufacturers to operate with fewer workers. Moreover, workers at such facilities are engaged primarily in keeping high-tech machines running smoothly versus assembling goods by hand, as in the apparel and electronics industries.

The move towards pulling production out of China in particular appears to be taking hold in Europe as well as the U.S. The Hackett Group, a process improvement consultancy, surveyed executives at European and North American manufacturing companies, and found that 46% are considering shifting some production out of China. 27% are actively planning or in the midst of making this change.