Tax and regulatory cuts boosted the return of manufacturing jobs to American shores, but a trade war could change that.
It’s too soon to tell how broad an effect the higher tariffs the United States is imposing will have on manufacturers’ decisions where to locate production, but in recent years there has been growth in the reshoring of manufacturing jobs in America as well as foreign direct investment (FDI) in the U.S.
A research organization called the Reshoring Initiative says that 576,000 jobs have been brought from offshore to the United States since 2010 through either reshoring or FDI. That includes 171,000 in 2017, which it says was 52 percent more when compared to its revised 2016 list.
Last year’s “huge increases were largely based on anticipation of greater U.S. competitiveness due to expected corporate tax and regulatory cuts following the 2016 election,” the initiative said. “Similar to the previous few years, FDI continued to exceed reshoring in terms of total jobs added, but reshoring has closed most of the gap since 2015.”
Harry Moser, the president of the Reshoring Initiative, founded the organization in 2009 because of his interest in bringing manufacturing back to the United States. The Reshoring Initiative tracks announcements from companies about new facilities and new investments. Moser is a former executive in the machine tool industry, including AgieCharmilles, part of Switzerland’s Georg Fischer, for which he was president.
He includes FDI when looking at reshoring since, as he views it, “the only difference between the two is whether the parent company is located in the U.S. or located someplace else. If General Motors starts to make an engine or a model here that they used to make someplace else, we call that reshoring. If Toyota starts to produce a car here, we call that FDI. So essentially in both cases the company has brought manufacturing jobs to the U.S.”
Moser admits the initiative doesn’t catch every change in employment. If a German chemical company adds 20 employees to an established factory in the United States, it probably is not going to gain any publicity.
He says the initiative does not count distribution jobs as reshoring. If a company makes automobile brakes in China, the Reshoring Initiative does not count the jobs they may generate in the United States. On the other hand, the initiative isn’t trying to track only pure made-in-the-USA products. It would count a factory that made pumps in the United States even if parts came from China or Italy.
The Reshoring Phenomenon. Moser believes that the tariffs being imposed by the United States probably will lead to more manufacturing in America.
“If we were a tiny country with no market here and you put heavy tariffs up, you could destroy the economy. … We’re still the biggest market in the world. … Our market is trillions of dollars. So when tariffs come up that make imports more expensive, the natural reaction is for companies to produce things here that they used to import,” says Moser, who estimates 77 percent of what the United States consumes is imported.
Of course, the same logic applies in the opposite direction, he says, noting the announcement by Harley-Davidson in June that it planned to move some production to Europe to avoid tariffs being imposed by the European Union.
Rosemary Coates, executive director of another organization, the Reshoring Institute, cites a 2015 Boston Consulting Group survey of companies with sales of more than $1 billion that found 17 percent actively reshoring and 37 percent either planning or considering it.
But a more recent study by the management consulting firm A.T. Kearney had a very different view: “U.S. manufacturers are not exactly coming back in droves.”
Kearney says when it released its fourth-annual Reshoring Index in July, there were “record imports from traditional offshoring countries in 2017 — a sharp reversal of the glimmers of hope seen in 2016. Imports of manufactured goods into the United States from the 14 largest low-cost country trading partners rose by a staggering $55 billion or 8 percent — the largest one-year increase since the economic recovery of 2011.”
Since 2013, when A.T. Kearney first started studying reshoring as a phenomenon, it says “imports of manufactured goods from the 14 largest low-cost countries have increased by $118 billion, or 19 percent, while U.S. manufacturing gross output has grown by only $81 billion, or 1 percent.
“There are several reasons for this ongoing trend away from reshoring, including the continued economic benefits of producing labor-intensive products overseas, the fact that significant offshore investments were made that are not easily abandoned and the domestic shortage of skilled labor for manufacturing operations,” said A.T. Kearney.
Weighing the Risks. “Although tariffs and political posturing could impact and potentially change the direction of the reshoring trend, there are many potential futures,” said Kearney. “Companies must weigh the risks and, if imposed, assess the longevity of tariffs on goods from low-cost countries to determine whether the United States is even the most logical location to move their manufacturing capabilities, for example, if China is no longer economical.”
The Reshoring Initiative disagrees with the report, saying while Kearney cites only 20 U.S. reshoring cases in 2017, it counted 223. “A.T. Kearney’s Reshoring Index does not actually measure reshoring. It essentially uses the trend in imports to imply a trend in reshoring,” it says.
What motivates companies to manufacture in the United States? The Reshoring Initiative says about 60 percent of companies decided to offshore based on comparing wage rates or the price of merchandise at the overseas manufacturer’s factory or warehouse. “Much of the strength of the reshoring trend has been due to companies becoming familiar with a broad range of factors (costs and risks) they had previously ignored. Understanding the reasons other companies have given for reshoring helps companies to determine whether those reasons apply to them also,” it says.
Coates says, “We don’t want the 23 cents-an-hour T-shirt production back in the U.S. because it doesn’t pay a living wage, and that means we would have to supplement people’s income with welfare if we don’t pay a living wage. What we want to see come back is advanced manufacturing. That is manufacturing that requires skills and includes automation and really a forward movement in technology that we just haven’t seen in manufacturing ever before.
“I always say, ‘This is not your grandfather’s manufacturing.’ We’re not going back to 1950 again where you put pegs in holes and that kind of thing,” she says. “What we really want are people who can run the robots or can handle the IOT (internet of things) or who can understand how a complex machine tool works,” Coates says.
Both Coates and Moser say that a desire by companies to have more responsive supply chains with shorter cycle times is a major driver of reshoring.
“Walmart’s Not Stupid.” Coates says a desire to advertise products as Made in the USA for marketing purposes or a genuine desire to improve the country’s economy is another major driver for reshoring.
When American Shipper interviewed her, she had recently returned from a manufacturing summit Walmart holds every year. The retailer has pledged to “purchase an additional $250 billion in products supporting American jobs between 2013 and 2023.”
“Walmart’s not stupid. They did this because when they started moving all of their sourcing overseas, they shut down a lot of manufacturing sites in America. …The people that worked in those manufacturing plants, they were Walmart customers,” she said. “So now they’re starting to emphasize ‘made in the USA’ products, which customers are willing to pay slightly more for, up to about 15 percent.”
She says Walmart’s sourcing has led to some companies in businesses such as plastic injection molding and small motor production opening factories in the United States.
“That small motor production had pretty much moved overseas in the early 1990s and now it’s starting to come back a little bit. And it’s really because Walmart is really sort of the mother of all supply chains,” Coates says.
The Reshoring Initiative agrees Walmart’s initiative is “generating measurable impact” and says it is “amazed that more retailers have not taken similar visible initiatives.” However, it says advertising a product as “made in USA” is generally a less-powerful motivation for FDI.
“FDI places more emphasis on government incentives and skilled workforce. Since reshoring is almost all from low-wage countries, reshoring companies automate to make up for higher domestic hourly labor cost.
“Since most FDI is primarily from companies in other developed countries, ‘Made in USA’ is a less powerful sales argument. Shifting from ‘Made in Germany’ to ‘Made in the USA’ has less brand value than shifting from ‘Made in China.’ Foreign companies can be recruited by all 50 states and often have larger projects; thus they receive more government incentives.”
Reshoring manufacturing can take some unexpected turns and even lead to foreign direct investment. Take the story of General Electric Appliances, which decided in 2012 decided to reshore production of some high end refrigerators, GeoSpring water heaters, and front-load washing machines to a factory in Louisville, Ky., from China and Mexico.
While the GeoSpring water heaters were highly efficient, using a heat pump heat water. But sales were not as strong as GE hoped, and it eventually sold the water heater business to Bradford White.
It sold the remainder of its appliance business was to China’s Haier Group in 2016 for $5.4 billion.
Haier has kept the GE Appliance name and heavily invested in the business. In June announced plans for a $115 million GE Appliance refrigerator factory in Decatur, Ill. It also has stated its goal is “to become the leading major appliance business in the U.S.”
But it faces a problem shared by other U.S. manufacturers: Li Pan, the overseas managing director for Haier told Reuters in August it has had to raise prices twice this year as U.S. import tariffs drive up costs.
Impact on Shipping. Danish Ship Finance, a specialized lender to the shipping industry, says that reshoring or nearsourcing — what it calls regionalization of production — could affect segments of the container shipping industry — in different ways.
In the May edition of its twice-a-year Shipping Market Review it notes, “Robotics and 3D printing minimize the role of labor in the production process, enabling production closer to end markets, shortening supply chains and reducing container lifts,” which could be a negative for the carriers moving cargo over long distances.
On the other hand, it says, “More regionalized production could strengthen short-sea volumes and support demand for feeder vessels.”
Richard Walkup, the president and CEO of Piranha EMS, a contract manufacturer in San Jose, Calif., specializing in electronic manufacturing, questions how much of the decision about where to locate production today has to do with trade and tax policy.
“I believe people are so used to automatically pulling the trigger and sending things offshore,” Walkup says. He questions whether some companies really know the actual landed costs of their products and adds some accounting systems do not properly recognize them.
A 2009 paper in Supply Chain Management Review, “Does Offshoring Still Make Sense,” noted, “Suppliers in low-cost countries have been able to offer ‘perceived’ prices 25 to 40 percent lower than those available onshore.” But it concluded, “The perceived advantages of offshoring may never have been as significant as thought.
“The actual cost advantage all along may never have been more than 15 percent — and for some products as little as 5 percent — when considering the ‘all-in’ costs of offshoring as understood by applying a robust total cost model.”
The United States is “still one of the most effective and efficient places in the world to build products, bar none,” contends Walkup. He says Chinese manufacturers “use labor as a resource,” and break down manufacturing into “many, many mini steps.”
Efficiency Gains. “The way we look at it, it artificially deflates the cost of building a product. We’re a lot more efficient here. The problem that we got into in this country and the way we’ve seen it is that people became lethargic and end up being specialists, not generalists. So when you start having a bunch of specialists on your staff who are specialized in one element of a project to build, let’s say, and you add more project specialists, the cost will go through the roof. Whereas in China if they’re going to do that, the costs aren’t going to go through the roof,” Walkup says.
Piranha has trained its employees in multiple disciplines, he says, so that a worker can solder one day and run a machine tool the next. Workers are happier and not fearful “that if their job becomes diminished that there is no other role for them to engage in, that they can be expendable or laid off,” Walkup says.
As befits a company in the heart of Silicon Valley, most of what Piranha makes involves electronic components, but it works for a wide variety of companies, including those in the medical, aerospace and gaming industries. It even has done work for a company that makes pedals and electronic components for controlling sounds from electric guitars.
Walkup says his customers have realized that in the United States they can get a better quality product, have access to a facility within minutes rather than a day if they need to address quality issues and have less to fear when it comes to piracy or counterfeit components being incorporated into circuit boards that they are making.
“We’re local, we’re right here, within minutes driving if they need to address any of those concerns in real time,” Walkup says.
He also notes that electronic products change much more rapidly than in the past and that getting to market fast is important if companies are going to differentiate themselves.
“It used to be you would roll out a product and it would take a year. Now we are talking weeks,” Walkup says.
The key to convincing them to reshore, he says, is finding managers who will not automatically decide to offshore production. “The guys at the top are the ones that have to trigger the guys down below: ‘You will go domestic. Go make it happen.’”
The FTZ Factor. Erik Autor, the president of the National Association of Foreign-Trade Zones (NAFTZ), says while his organization does not specifically track data on reshoring, there has been, in some industries, a trend toward reshoring, and FTZs “can be an attractive tool for folks who are considering reshoring operations.”
“The tariff benefits that are available under the foreign-trade zones program in some cases substantially reduce the cost of manufacturing in a U.S. zone compared to manufacturing in the U.S. outside of a zone,” he says. “And if exports are part of the manufactured mix, there are additional tariff benefits available if you’re exporting from a zone.”
Joe Hedges, the international program manager for San Jose, the grantee for Foreign-Trade Zone 18, says FTZs are both “an important component of reshoring or manufacturing or the overall trade environment, and certainly it’s also a very important program for foreign-owned companies that establish facilities in the United States” like Japanese and German automakers doing foreign direct investment.
He notes that much of the material that enters FTZs actually is produced in the United States and is combined in the manufacturing process with imported materials.
The U.S. Foreign-Trade Zones Board produces an annual report with a statistical review in which it distinguishes between warehouse/distribution and production activities in FTZs. It tabulates the value of goods entering the zones based on whether they are foreign or domestic “inputs.” (The board notes domestic status merchandise includes both domestic-origin items and foreign-origin items on which duty was paid prior to entering an FTZ.)
In 2016, the value of domestic items for production was $277.9 billion at FTZs or 72 percent of the total versus $108.2 billion for foreign items. For warehousing and distribution activity, a lower percentage, just 48 percent, had a domestic origin.
Rock Magnan, president of RK Logistics in Fremont, Calif., says his firm recently has been working with Coates to find more manufacturers that can benefit from use of an FTZ.
He says several of RK’s customers use FTZs to take advantage of so-called inverted tariffs. This is used when a component of a manufactured product is subject to a high tariff, but the finished product is subject to a lower tariff or none at all.
For example, Magnan says one of the companies his firm works with assembles electric skateboards in an FTZ in Fremont, importing skateboards from China and batteries from Japan. While lithium ion batteries are subject to a 3.4 percent duty, the assembled skateboards are duty free when they leave the zone and enter the United States.
Similarly, RK stores batteries for Tesla’s Model S in an FTZ and then delivers them as needed to its assembly plant in Fremont, which is in a subzone of FTZ 18. Once incorporated into the automobiles, the batteries used to power the Tesla automobiles are not subject to U.S. tariffs.
RK’s largest customer, LAM Research, a maker of equipment used to make semiconductors, also is located in an FTZ 18 subzone. Parts from abroad can be stored in LAM’s warehouse duty free. Duty is not paid unless and until they enter the U.S. customs territory. If they are shipped to customers in Asia or Europe, for example, duty — or the complication of applying for duty drawback — is avoided. FTZs are ideal, says Magnan, for a worldwide spare parts operation.
“The Trump tariffs that we’ve been seeing this year have complicated things,” says Autor. “We’ve seen that, particularly in industries where steel and aluminum are significant inputs, that the tariffs have really raised the cost of manufacturing in the U.S., including in FTZs.”
That’s because steel and aluminum subject to the Section 232 tariffs — 25 percent and 10 percent, respectively — imposed by in March, still apply to goods entering FTZs, he says.
Companies can avoid duties or claim drawback for a refund of any duties they have paid if they are exporting, says Autor, “but, as a general proposition, zones do not provide a safe harbor from the various tariffs including the Section 232 tariffs.”
For example, BMW, one of many auto manufacturers using an FTZ, “to protect its Chinese market may have to move some of its production from South Carolina to China to avoid the steel and aluminum duties in the United States and the Chinese retaliatory duties on exports from the United States,” he says.
NAFTZ also is concerned about Section 301 tariffs because of what Autor says is a quirk in the way the foreign-trade zone entry process works.
When a manufacturer moves a product out of an FTZ into U.S. commerce, it fills out an entry document that lists the country of origin of the highest valued input.
Suppose a product subject to 301 tariffs is manufactured in an FTZ. The product may have 30 parts — some made in the United States and some made in a variety of foreign countries. But as that product leaves the FTZ and enters U.S. commerce, the manufacturer is required to fill out an entry document that lists the country of origin of the highest value input.
“The concern is that this might imply the American-made final product is Chinese and subject to a Section 301 tariff, merely because the highest-value input happens to be Chinese origin even if it is not a subject of the Section 301 tariffs or represents only a small fraction of the value of the final FTZ-made product,” Autor says.
“We are trying to correct that situation,” says Autor. “We don’t think it was ever the intention of Congress or anyone else to impose duties on U.S.-made products.”