The much-ballyhooed “in-sourcing” trend is real enough. But it won’t amount to much unless Washington acts.
In January 2012, President Barack Obama convened nineteen CEOs and business leaders at a White House forum to tout a potentially promising new phenomenon: instead of “shipping jobs overseas,” U.S. companies were bringing them back. “[W]hat these companies represent is a source of optimism and enormous potential for the future of America,” Obama said. “What they have in common is that they’re part of a hopeful trend: they are bringing jobs back
Anecdotally, the record is impressive. A number of major companies—including some of the same firms that first took flak for “offshoring” jobs to China—are now expanding their manufacturing operations stateside. General Electric, for example, says it has created 16,000 new U.S. jobs since 2009, including jobs at a new locomotive plant in Fort Worth, Texas; a solar panel factory in Aurora, Colorado; and an engine manufacturing facility in Pennsylvania. The company’s recent revival of Appliance Park, in Louisville, Kentucky, as a maker of high-end refrigerators, was the subject of high-profile coverage, including a recent piece in the Atlantic.
Other companies that have seemingly caught the “reshoring” wave are appliance maker Whirlpool (which rejected sites in Mexico in favor of Tennessee), and iconic brands like Intel, Canon, Caterpillar, and DuPont. All of these firms have reported expanding or building new U.S. facilities in the last few years. In December 2012, computing giant Apple announced it would bring some Mac production back to America, investing about $100 million to do so.
So given these recent wins, can “insourcing” save America’s economy?
No. And yes. On one hand, insourcing is unlikely to be the magic elixir for a job market that’s only slowly gaining steam more than three years after the official end of the Great Recession. Only some jobs are coming back, and not in nearly large enough numbers to reverse the overall decline in U.S. manufacturing employment. While manufacturing gained about 530,000 jobs between January 2010 and December 2012, America is still 7.5 million manufacturing jobs down from its last peak in 1979. Even if reshoring picks up steam, manufacturing employment is unlikely to recapture the heights of the 1950s, when more than one in three employed Americans worked the line.
Nevertheless, policymakers should encourage insourcing as much as possible, even if net job growth might be a fraction of what’s been lost. At stake is something much broader—America’s future capacity for innovation.
Though President Obama has praised insourcing’s leaders as “CEOs who take pride in hiring people here in America,” what’s prompting some companies to consider insourcing isn’t mere corporate patriotism.
For one thing, some companies have learned the hard way about offshoring’s hidden downsides, such as the lack of intellectual property protection for proprietary manufacturing processes, quality control issues, and the frustration of waiting weeks for products to arrive by container ship while rivals potentially rush hot new products to the shelves. Moreover, long supply chains mean more exposure to earthquakes and tsunamis, wars, oil shocks, and other unpredictable disruptions.
In an oft-cited 2011 study, the consulting firm Accenture surveyed 287 major companies and found that nearly half are plagued by “cycle or delivery time” problems and quality issues due to offshoring. For some manufacturers, such as baby crib makers, the problems went far beyond quality to basic safety. In 2010, the Consumer Product Safety Commission recalled more than two million cribs—made mostly in China, Thailand, Mexico, Indonesia, and Croatia—for safety defects leading to at least thirty-two infant deaths.
The breadth of these recalls prompted at least one crib manufacturer—North Carolina-based Stanley Furniture Company, Inc.—to invest about $9 million on a plant in Robbinsville, North Carolina, to produce its “Young America” line of cribs and other children’s furniture. In its 2011 annual report, the company made this business case:
Because we target a younger, often pregnant consumer shopping for her child, we believe Young America products must be domestically made in our own manufacturing facility to meet both a well-informed consumer’s demands for product safety and the health of her child. In addition, our retailers are finding that this consumer, unlike the consumer for our Stanley brand, has a growing desire for certain products carrying the words “Made in USA.”
Another advantage of “Made in the USA” is the ability to meet customers’ needs better and more quickly if production is nearby. BMW and Nissan, for example, have built plants in South Carolina and Tennessee instead of just shipping more cars from Germany and Japan to meet growing U.S. demand.
Perhaps most significant, however, are offshoring’s shifting economics, which have begun favoring U.S. production. In a 2011 study by the industry-supported Manufacturing Institute, researchers calculated that the “raw cost” of American manufacturing—including wages, raw materials, and capital costs, but excluding taxes, regulatory compliance, and other “structural costs”—is now 9 percent lower than the average raw cost of production among America’s nine largest trading partners (including China, but also high-cost places like Canada). In 2003, by comparison, American raw production costs were 20 percent higher than the average among our trading partners.
Several factors account for this dramatic about-face. The Manufacturing Institute estimates, for instance, that raw production costs in China skyrocketed 132 percent from 2003 to 2011. This includes Chinese wages, which the Bureau of Labor Statistics (BLS) reports more than doubled from 2003 to 2008 (albeit from 62 cents an hour to $1.36). Meanwhile, American production costs have fallen. The natural gas boom, for example, has meant that industrial prices for natural gas are less than half what they were in 2001.
New advances in technology have also made American production cheaper by increasing productivity and shrinking labor as a share of total costs. Instead of hiring low-cost Chinese workers, companies can now use even lower-cost American machines. 3-D printing, for example, is part of a hot new trend in “additive manufacturing,” where 3-D objects are built through the successive layering of materials from a computerized blueprint. Not only does this technology erase the lag time (and even the distinction) between thinking and making, it’s portable and absurdly cheap. For about $1,500, a “desktop” 3-D printer can eliminate the need for a Chinese factory, along with its attendant headaches.
The downside is that 3-D printing, as well as other advances in automation, robotics, and other technologies, eliminates the need for American workers too. When DuPont recently built a highly automated $20 million battery production facility in Chester, Virginia, to make state-of-the-art lithium ion batteries for electric cars, it created just eleven new manufacturing jobs.
But again, insourcing’s potential isn’t so much about new manufacturing jobs. Rather, the current mini trend toward insourcing might be a golden opportunity to lure back the research and development and innovative capacity that the nation lost in the rush to offshore—and perhaps turn the mini trend into a mega trend that could transform the nation’s economy.
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