"Re-shoring” – bringing manufacturing capacity and jobs back to the United States — is a hot topic in the retail industry, and the impetus isn’t so much patriotic as it is economic.
Some feel that the low cost of manufacturing in places like China, Bangladesh, India, Malaysia and Vietnam is an inviolate competitive issue, and giving it up would be tantamount to fiscal suicide. Another faction believes the decades-long trend in off-shoring could lose some steam thanks to several factors. Paramount among them is that higher wages in China are resulting in a greater cost advantage for domestic production of everything from apparel to refrigerators. Additionally, escalating transportation costs are reducing profitability.
However, some feel the true value of overseas production is being vastly underestimated and is critical to the U.S. economy and its workforce. “American consumers and policy makers tend to look at clothes and finished products and ... put them into one of two categories — either imported or made in America,” says Susan Hester, managing partner in international consulting firm Moongate Associates. Hester is the author of a new study titled “Analyzing the Value Chain for Apparel Designed in the United States and Manufactured Overseas” that was conducted for NRF and other members of the Trans-Pacific Partnership Apparel Coalition.
“This approach is outdated and inaccurate,” she says. “The study we published indicates U.S. workers are extremely valuable in delivering affordable clothes to American families.”
Moongate’s survey, which included companies with total retail apparel sales of $92 billion, outlined several facts that underscore the true value of overseas apparel production. U.S. value-added as a percentage of the final retail price in categories ranging from shirts to pants averaged 70.3 percent — meaning that 70.3 percent of the retail value is directly related to business activities by U.S. workers.
Value-added includes both blue- and white-collar workers in product design, research and development, transportation logistics distribution, product safety, customs, quality assurance, environmental monitoring, marketing, merchandising and sales. These and other U.S.-based activities supported an estimated 2.6 million workers in 2011.
The study also concluded that removing tariffs under trade agreements would lower prices to consumers, increase demand and create more jobs and profits all along the global supply chain, and particularly in the United States.
“This study shatters several widespread myths about imports and trade,” NRF president and CEO Matthew Shay says. “Labels identifying clothing or any other product as made outside the U.S. are largely meaningless.”
Rising wage rates
A survey by the Boston Consulting Group late last year found that more than 80 percent of consumers would be willing to pay more for U.S.-made products in order to keep jobs in the United States – as much as 60 percent more for wooden baby toys, 30 percent more for mobile phones and 19 percent more for gas ranges.
Interestingly, the same survey found that 47 percent of Chinese consumers prefer American-made goods. Observers say this is due to the emerging middle class and rising demand for any luxury goods made outside of China.
Although the difference in pricing between foreign and domestic products is problematic to some, Dave Schiff has a different view. Schiff is the founder of Made Movement, a marketing agency specializing in American manufacturing.
“‘Made in America’ will succeed for the same reason organic has succeeded,” he said at a January Financial Times conference in New York City. “Just like people didn’t want to eat food that was poisoning them, they want to live in a better economic climate.”
The history of manufacturer outsourcing is a bit vague. Many scholars believe the transition from domestic to overseas production began with efforts to rebuild the devastated Japanese and European economies following World War II. Prior to that, America was considered almost completely self-sufficient in industries like apparel, textiles, steel and automobiles, according to economic historians.
The heavy outsourcing of manufacturing for products like apparel didn’t take hold until the 1970s and ’80s with the advent of globalization and the development of factory cities in China and India.
Most sources agree that cost was the driving factor — and the primary reason an estimated 90 percent of clothing is imported. BCG analysts have noted that the average hourly wage in China was 58 cents when the country entered the World Trade Organization in 2001. This reportedly cost the United States an estimated 2.8 million manufacturing jobs.
Over the last half decade, wage rates in China have risen about 20 percent annually. Today even semi-skilled labor costs far more; BCG estimates that the average wage will rise to about $6 an hour by 2015. The result has been a shift of manufacturing to lower-wage countries like Vietnam and Bangladesh.
Another BCG estimate sees wage rates in China’s Yangtze River Delta – the epicenter of the country’s skilled workforce – rising to 61 percent of U.S. wages by 2015, making it less attractive to U.S. marketers and manufacturers.
The Bureau of Labor Statistics reports that the output of American factory workers is $73.45 per hour — twice as much as Taiwanese workers and one-third more than German factory workers.
The combination of rising foreign wages, greater productivity among American manufacturers and relatively low energy costs means the cost gap for most goods will close to about 7 percent by 2015.
Not everyone agrees, though. That argument “grossly oversimplifies the global supply chain,” according to Marshall Fisher, professor of operations and information management at the Wharton School at the University of Pennsylvania. Commenting in an article on knowledge@wharton, Fisher noted that while Chinese wages have grown five or six times over the past 20 years, wages in China’s Pearl Delta assembly plants are still only about 12 percent of U.S. manufacturing wages.
Furthermore, outsourcing is moving to areas like inland China, Vietnam, Indonesia and Cambodia, where wages are only about 6 percent of the average U.S. rate. And outsourcing could be relocated to even lower-wage countries like Myanmar and North Korea, Fisher noted.
Nonetheless, a number of U.S. manufacturers have decided to bring some production home, and many others have it under consideration.
GE Appliances is spending about $1 billion to revamp production facilities in Kentucky, Alabama, Georgia and Indiana with the intention of replacing manufacturing in China and Mexico for new high-tech refrigerators and washing machines. NCR Corp. has shifted manufacturing of ATMs from China to Columbus, Ga., and major Asian auto manufacturers — Honda, Nissan and Toyota — are stepping up U.S. production of vehicles that will be exported to South Korea and other parts of Asia.
Re-shoring of apparel production is less likely in the near term, according to industry observers, because it is less expensive to ship clothing than autos or refrigerators.
General Motors is taking its IT systems back in house, a move the auto giant expects will stimulate innovation and improvements. Many companies might think twice about offshore IT operations for another reason — worker attrition.
Kate Shearer, an analyst with ThinkSolutions, a management consulting firm specializing in outsourcing and near-shoring opportunities, notes that high turnover on a project team can significantly reduce productivity and cost-effectiveness. “Companies don’t want to begin a project with a team knowing that 55 percent of that original group could be gone — and replacements will need to be trained — every year,” she says. “This is the reality for some providers in India … in the IT and business process outsourcing sectors.”
Attrition rates in China are about 25 percent, with far lower rates in the United States, Chile and Brazil. “With a well-developed sourcing market where companies compete fiercely for skilled labor, employees in India will relocate for cents more per hour,” Shearer says.
The United States is not the only country benefitting from near-shoring. China and India are starting to lose some manufacturing business to Eastern Europe — La Perla has moved production of its mass-market lace underwear line from China to Turkey and Tunisia and nightwear to Portugal.
Some manufacturers have resisted the decades-long trend, remaining staunchly American-made. This includes L.L. Bean, Brooks Brothers, Carhartt, Hart Schaffner & Marx, Hickey Freeman, Thom Brown and Red Wing footwear. Club Monaco has launched apparel lines that are being marketed as “Made in the U.S.A.”
New Balance is reportedly the only remaining athletic shoe manufacturer with plants in the United States — most in New England, a region that was once the hub of the U.S. shoe manufacturing industry.
These plants represent about 25 percent of total production, according to the company. A recent article in The Wall Street Journal noted that New Balance is trying to keep those plants operating by opposing moves to eliminate tariffs on imports, which have been in existence since the 1930s. The conundrum, according to the article, is that the same tariffs that benefit New Balance’s U.S. plants also raise the cost of its imports. China, for instance, is one of New Balance’s fastest-growing markets, with nearly 700 stores and another 500 slated to open this year.
Walmart -— often cited as a key driver of overseas sourcing trend — is also intent on re-shoring more business. The company plans to purchase an additional $50 billion in U.S.-made products over the next 10 years, and its “Made Here” collection of bath linens launched in mid-March. The move to domestically made goods could also help retailers avoid human rights, labor and public relations issues, such as those that resulted from worker deaths in Bangladesh following a January fire at a factory with locked exits. Two months earlier, a fire at another apparel plant in Bangladesh killed 112 workers.
While not directly related to purchasing U.S. products, Walmart has also initiated a zero-tolerance policy for suppliers when it comes to ethical sourcing and plans to publish on its website the names of factories that aren’t authorized to do business with its suppliers.
Still, re-shoring efforts will largely remain a matter of economics, and could return two or three million manufacturing jobs to the United States by 2020, according to Hal Sirkin, senior partner and managing director of BCG. “In all this process will provide $100 billion in added economic growth to the U.S. over the decade,” he predicted.