By JoAnn Crary, President, Saginaw Future
After decades of moving jobs overseas, American companies have begun returning operations to U.S. soil in a process that is known as “reshoring.” In the 1970s, many U.S. companies began offshoring jobs—primarily in the manufacturing sector—to Asia in order to take advantage of significantly lower labor rates overseas. While offshoring continued over the following decades, the pace truly accelerated after China joined the World Trade Organization in 2001. In fact, it is estimated that six million American manufacturing jobs were lost between 2000 and 2009.1 In the current decade, the tide has begun to change directions with American companies discovering the benefits of producing goods and providing services including customer service and IT support in the United States.
Over the past year, the International Economic Development Council (IEDC) has spoken with reshored companies and conducted research on the primary reasons why companies are making the decision to reshore. There are numerous reasons for the reshoring trend, but a primary factor has been the rapid increase in labor rates abroad. Challenges with lengthy product lead times, ensuring quality control, and protecting intellectual property have also been stated as reasons for coming home. Sound familiar?
Where and Why of Reshoring
When combined with the significantly higher productivity of the U.S. labor force and the availability of low-cost energy as a result of advancements in hydraulic fracking, it is easier to see why the U.S. is once again an attractive location for manufacturing investment. The Reshoring Initiative, which is an industry-funded group that works to research, track, and promote reshoring in the United States, estimates that 50,000 manufacturing jobs were reshored between 2010 and 2013.
While American companies are returning operations to locations throughout the United States, there are particular hotbeds of reshoring activity. Using data from The Reshoring Initiative and its own independent research, IEDC—which is the world’s largest membership organization serving the economic development profession—was able to develop a heat map that visualizes the top U.S. locations for reshoring activity. The heat map below shows California, Illinois, Ohio, Texas, and Pennsylvania as the states with the highest number of reshored projects.
While the 50,000 manufacturing jobs that were reshored between 2010 and 2013 is a significant number, it pales in comparison to the estimated two to three million jobs with the potential to be reshored. 2 This potential is important for the U.S. economy, because all signs point to the reshoring trend being here to stay. The Boston Consulting Group, which released the results of its third-annual survey of U.S. manufacturing executives in October 2014, reported that 54 percent of respondents stated that they are “considering” or “actively considering” moving some production from China to the U.S. This percentage was 17 points higher than it was in 2012. Meanwhile, 16 percent of survey respondents reported that they are already actively reshoring at least some production from China, which was more than double the amount who had reported reshoring in 2012. 3
Tools for Reshoring
It is clear that many U.S. companies with overseas operations realize that reshoring is a potentially valuable business opportunity; however, that potential can be hard to quantify. But as firms consider factors such as shipping costs, product quality, and product lead time, the company may be able to determine that it makes sense return is production to the U.S. Yet, without the resources to efficiently and accurately estimate the costs of doing business overseas, firms may not have had the ability to do a total cost comparison. That is until now. There are free tools available for companies and location consultants to use in making this determination. Two such tools include:
- Total Cost of Ownership Estimator 4 —This free online tool from The Reshoring Initiative “helps companies account for all relevant factors—overhead, balance sheet, risks, corporate strategy and other external and internal business considerations—to determine the true total cost of ownership.” Companies can input their unique data into the calculator and receive a total cost of ownership analysis that includes numerous cost calculations, charts, and graphs.
- Assess Costs Everywhere (ACE) Tool5 — The U.S. Department of Commerce provides this free tool for companies to develop an analytic framework, links to public and private resources, and case studies that are intended to “provide manufacturers with the top reasons for investing and sourcing in the United States.”
Economic Development Organizations Assist Companies in Reshoring
Once a company has run the numbers and decided to reshore, it may still face numerous challenges when returning to the U.S., including recruiting a skilled workforce, finding new suppliers, and securing necessary permits. This is where local, regional, and state-level economic development organizations (EDOs), though too often underutilized, can play a significant role in assisting companies to reshore.
For instance, these EDOs often have relationships with local high schools, community colleges, and other post-secondary educational institutions that can be leveraged for workforce training purposes. If a manufacturing company that is reshoring requires workers with a specific set of skills, economic development organizations can often work to help ensure that these workforce needs are met.
EDOs are also able to assist companies with supply-chain mapping and connect businesses that are reshoring with local and regional suppliers. Economic development organizations should have an inventory of suppliers in the region and will be able to make necessary introductions.
When reshoring a manufacturing operation requires significant upgrades to the proposed site, EDOs are able to assist with procuring permits. When these upgrades include infrastructure enhancements, EDOs can coordinate with local utilities to effectively address the reshoring company’s needs.
Lastly, EDOs may be able to arrange financial incentives like tax credits for companies that reshore. Companies who agree to meet certain hiring and/or investment benchmarks may be eligible for local and state-level financial tax incentives. State EDOs can assist companies to make connections with local level organizations.
Yet, most companies that have decided to reshore are unaware that EDOs offer such a wide range of reshoring assistance. Over the summer, IEDC conducted over 30 interviews with CEOs and other C-Suite representatives of reshored companies. Only a small fraction of those interviewed indicated that their company had utilized the services of a local or state-level EDO.
While part of this may be due to a lack of awareness on the part of companies, another challenge is educating economic developers about the opportunities that are available to assist companies in reshoring to their communities. To that end, IEDC’s will be publishing a Reshoring Toolkit in 2016 that aims to help economic development practitioners to better understand their available resources and develop a robust set of tools that will be valuable for assisting companies interested in reshoring.
Rapidly increasing wages abroad, particularly in China, continue to lead more American companies to analyze their overseas operations in order to determine if returning production to the U.S. is a viable business opportunity. As more companies decide whether to come home, it is important for them and the location consultants they work with to be aware of the resources available to assist in both the decision and the reshoring process. For instance, companies should consider using the Total Cost Estimator or the Assess Costs Everywhere (ACE) Tool to calculate and analyze the true costs of operating overseas.
Upon reaching a decision to reshore, companies should proactively reach out to both local and state-level economic development organizations for customized assistance. Economic developers will be able to:
- Facilitate access to local, regional, and state-level workforce training programs.
- Connect reshoring business with suppliers and assist with supply-chain mapping.
- Coordinate with local utilities to effectively address the reshoring company’s infrastructure needs.
- Arrange financial incentives such as tax credits.
When these services are taken into consideration, the decision to reshore may become even easier. Over 300 firms have recently discovered the advantages to reshoring their operations in the United States while also remaining competitive in their industries. Not only does the company profit from the decision to reshore, but the result can also be a boon for the communities to which they return.