The business case for offshoring production is shifting. Some North American companies are bringing production back a little closer to home, presenting intriguing opportunities to ports.
Made in China
A little more than a decade ago, U.S. companies found making the decision to offshore production to countries such as China singularly easy – low labor rates trumped virtually every other decision variable. Outsourcing to low-cost locales meant lowering the overall price of goods to consumers and raking in enormous profits. The Made in China label became ubiquitous, and entire global supply chains were spawned.
Offshoring made sense for products whose manufacture was labor-intensive, or whose raw materials or consumers were found in other parts of the world. As long as the products were not particularly sensitive to shipping costs or the eccentricities of transport, gaining a foothold in countries with massive market growth potential, including China and India, was a win-win situation.
But, in the illustrious words of Dylan, “Times they are a-changin’.” The dynamics of offshore production, especially escalating wages and higher energy/transportation costs, have generated a flurry of analyses and an ever-growing wish list that favors bringing at least some production back to North America.
The Wish List
A decision to reshore (nearsource, nearshore, smartshore, inshore or, when production comes back to the home country, homeshore) goes far beyond labor and transportation costs.
Chad Moutray is chief economist for the D.C.-based National Association of Manufacturers (NAM). He said, “There is a wholesale re-evaluation of the supply chain going on. Rising costs in China and a narrowing labor differential have helped make the U.S. more competitive. But reshoring isn’t for everyone.” Moutray cited high U.S. taxes and a disadvantageous tax code, for example, as compelling reasons for some to stay offshore.
In recent studies, Michigan-based AlixPartners found 9 percent of manufacturing executives have already taken steps to nearshore operations and 33 percent plan to do so within the next three years; Supply Chain Digest found that 22 percent of shippers shifting production plan to use the U.S. (and another 18 percent will source from Mexico); and, Prime Advantage’s 2013 report indicates more than one in five respondents to their survey have brought international sourcing closer to U.S.
Natural Gas Boom
Impetus for homeshoring is coming from the ready and economical supply of natural gas in the U.S.
Hal Sirkin, partner in The Boston Consulting Group (BCG), said, “The U.S. is now getting natural gas at 30 to 40 percent of world cost.” Companies that previously exited the U.S. have yet another reason to return home. Sirkin said, “They are finding they can get their energy and even their raw materials cheaper – ethylene is a key feedstock for manufacturers of plastics and chemical products.”
In April 2012, NAM announced that additional shale gas development could drive economic growth and create 1 million manufacturing jobs by 2025 (manufacturers consume about one-third of the U.S. energy supply). Economist Moutray said that other energy-intensive industries, including steel, could be spurred by lower gas prices and a ready supply.
Tianjin Pipe Company is constructing a $1.3-billion, 600,000-ton-per-year, seamless oil and gas pipe plant alongside the Port of Corpus Christi.
The Count at Corpus Christi
The same developments that are incentivizing homeshoring to the U.S. are alerting multinationals from Europe and even Asia. At the Port of Corpus Christi, CEO John LaRue provides convincing arguments that have attracted three major plants recently. The fifth largest manufacturer of pipe in the world, China-based Tianjin Pipe Company, will build a $1.3 billion, 600,000 ton per year, seamless oil and gas pipe plant that will be operating in 2015. Importing iron ore, pig iron and other raw materials through port facilities, it will then sell finished product in the U.S. and Canada, with about 20 percent going further afield. A deepwater port, a plentiful supply of natural gas, excellent rail access and a stable workforce were critical factors in the decision to reshore from China and Canada.
In March 2013, Austrian specialty steelmaker voestalpine Group announced plans to build a $700 million plant in Corpus Christi, with operations starting in 2016. It will make two million tons of hot briquetted iron and direct-reduced iron for the company’s Austrian steel production sites. The U.S. site determinants, for voestalpine’s largest foreign investment to date were logistics, energy supply, a well-educated workforce and the political environment.
A third firm, the privately-held Italian conglomerate M&G Group, plans to build a $900 million PET resin and purified terephthalic acid plant, described as the world’s largest. In a corporate release, M&G polymers unit CEO Marco Ghisolfi said, “The synergies of the location, adding to the unmatched size and integration efficiency of the plant, will further remove logistic costs, making our operation by far the world’s lowest cost.”
Opportunities for All
Should the stream of recent announcements for new manufacturing plants, including the Port of Corpus Christi’s exciting hat-trick, encourage other ports? The Port of Panama City’s CEO Wayne Stubbs thinks so. He said, “Our Linea Peninsular service between Progreso, Mexico and Panama City is three times weekly. What I am hearing is that Mexican companies using the service are in a position to respond quickly to changing customer needs, and to reduce inventory carrying costs.”
He said manufacturers should find reshoring to Mexico attractive now for bulky products, such as furniture, in part due to transportation costs and speed to market. “In our case, we do have opportunities with the Yucatan; our four-day, door-to-door [all-water] service is very compelling,” said Stubbs, and although the lion’s share of trade with Mexico still moves over land, any development that spurs trade will provide opportunities for ports and shipping lines, as well as inland transportation companies.
Free Trade Agreements
NAM economist Moutray agrees with Stubbs. He said, “Any time you can bring down barriers to trade, that helps. From the three recent trade agreements we anticipate $16 billion in additional manufacturing growth. We need to be negotiating more agreements. If you look at manufactured goods exports, we have a trade surplus with all of the countries that we have free trade agreements with. Bringing down barriers allows U.S. manufacturers to go out and sell to rest of world – and 95 percent of the population lives outside of the U.S.”
Although economics are key, BCG’s Sirkin noted that the U.S. is a “low-issue” country, which makes the improving economics that much more attractive. Mexico also has a distinct advantage. “Being right on the border and eliminating a 5,000-mile supply chain helps,” Sirkin said.
Canada’s proximity and lasting ties, despite a higher cost basis, should also lead to increased business to the north, supplying the reshored plants in the U.S.
Tipping Point Industries
Sirkin was lead author on a series of studies including Made in America Again – Which Industries and Why? He concluded that seven industries were near the “tipping point” for reshoring, given a quantitative analysis of logistics costs versuslabor costs. The study estimated the total potential value of reshored production to the U.S., plus associated exports from the U.S., at $80 billion to $120 billion (with roughly 25 percent of those goods more likely to be made in Mexico).
Offshoring was kick-started in 2001 when Chinese wages were 58 cents per hour and the U.S. had low exit barriers (to closing plants, for example), according to Sirkin. But now, he added, “Wages have risen at a rate of 10 to 20 percent per year, and productivity has not grown as quickly. China is no longer the default low-cost manufacturing location for supplying the U.S. market. In 2015 we think the situation will reach an equilibrium and production will begin to shift.” He said, “Companies will repatriate jobs to the U.S. and nearby. We are starting to see it happen, but offshore wages need to rise a bit more.”
The already thriving U.S. computer sector, with U.S.-based production by major leaguers including Dell and HP, and coming production by others like Lenovo, has joined the dialogue.
Apple CEO Tim Cook, who came of age fixing Apple’s manufacturing inefficiencies, acknowledged that Apple is working on moving some manufacturing back to the U.S. Some Apple parts, including glass and central processing units, are already American-made. Industry observers suggest that Apple could mirror the car industry, offshoring some products, nearshoring some and doing final assembly in the U.S.
If Apple sets a profitable precedent, other high-end consumer electronics production could return, creating U.S. manufacturing jobs and re-jigging global logistics. According to Jim Greenberger, executive director of the advanced battery trade association NAATBatt, a rebirth of consumer electronics manufacturing in the U.S. could spin-off into related sectors, accelerating the development of advanced batteries, for example, or could possibly lend the U.S. a modicum of control over consumer electronics technologies that have military and national defense applications.
Florida-based Jabil Circuit, Inc., is a leading manufacturer of circuit boards and diverse electronics. It began supplementing U.S. production in the ‘90s and now has dozens of sites in Asia, Europe and South America. Spokesperson Beth Walters said that although Jabil manufactures for customers around the world, “being an American company, we are always looking for opportunities to enhance our U.S.-based operations. … We have operations in numerous states and currently have 5,000 U.S.-based employees.” Walters said the company believes that sourcing closer to home “should always be part of the conversation, but it needs to make business sense, too.”
Proving that, Jabil serves what it calls “high velocity” customers from many locations throughout the U.S., but also from sites around the world. In the automotive, digital home, mobility, point of sale and printing industries, supply chain speed is of the essence.
Eduardo Saavedra, vice president of business development for The Offshore Company, a Tucson-based company that helps companies initiate and manage production in Mexico, said that he is fielding a steady stream of calls from manufacturers evaluating Mexican sites.
Saavedra said the alarming wage hikes in China bode well for Mexico. He said, “We have several new PC clients, and also see continued growth in more mature industries, such as automotives and aerospace, pushed to some extent by the OEMs to not have all their eggs in one basket.” He said global companies, such as Foxtrot and Jabil, which are already established in Guadalajara, for instance, seem to benefit from clustering and from their proximity to U.S. markets. “The economies of scale built into their plants and their supply chains are creating synergies for other EMS companies,” he said. “They can feed on each other.”
If production transfers from Asia to Mexico, there will be more of the predominant over-the-road traffic between Mexico and the U.S., but also more potential for all-water carriage. “World trade is not static. Preparations by logistics companies take time; most of the time things move relatively slowly and in an evolutionary, not revolutionary way. But there are opportunities. It is very dynamic,” said BCG’s Sirkin.
The Evolving Geography of Supply
Saavedra said, “With growth in Mexico I can see more work for ports in certain types of industries – heavy/voluminous input product from Asia – but the growth will be slow.” Some West Coast ports may notice a subtle shift in their mix of goods. “Instead of finished goods, it will be raw materials, intermediate goods or base goods,” according to Saavedra.
Jim MacLellan, director of trade development for the Port of Los Angeles, said his port has noticed an increase in nearshoring in the past year or so, specifically in the former Maquiladora area in North Baja adjacent to the California border, where a good supply of graduates with engineering and technical education help entice manufacturing. He said, “Tijuana already relies upon the U.S. for $11 billion in supplies for this [manufacturing] sector, including $6.5 billion in electronics, $1.5 billion in medical devices and $1.2 billion in aerospace parts. The port benefits from increasing supplies going to these growing plants.” Unfortunately, delays at the border might impair growth, but, he said, “If a manufacturing base continues to grow at the border, the Port of Los Angeles is positioned to be a solid gateway for imported parts that would then be trucked or railed down to the Mexican border.”
Extensive homeshoring could help improve the U.S. trade imbalance. Economist Moutray said, “To the extent that reshoring is taking place on a large scale that will mean U.S. manufacturers are increasing their overall global competitiveness and growth in exports should outstrip growth in imports.”
In late March 2013, The Aspen Institute and the Manufacturers Alliance for Productivity and Innovation released an econometric forecast model showing potential for a U.S. manufacturing resurgence that by 2025 would help create the first trade surplus since 1975. The study found that, with some adjustment of key drivers, such as regulatory and tax policy, U.S. manufacturing could grow dramatically.
MacLellan said his port is prepared for the export side of the equation. “Companies such as American Apparel, for example, have expressed the advantages of manufacturing in the U.S. and the growing demand for their products abroad. This trend could lead to more exports from the U.S. through the Port of Los Angeles.”
The growing trade deficit with Europe, which according to the U.S. Census Bureau reached almost $116 trillion in 2012, may be ready for correction too, although with the continued growth of world trade in general, it is hard to predict. BCG’s Sirkin noted, “We’ll see the same kind of effect from reshoring with Europe as with Asia.” He gives examples of Siemens and Rolls Royce already making parts in America for U.S. consumption.
The Reshoring Harvest
Today, revisiting former offshoring decisions is de riguer. Multinationals aim to meaningfully improve outsourcing and harvest the main benefits – profits.
Ports will be vying to attract new manufacturing to port regions and to build cargo volumes of inbound raw materials and outbound finished products, to grow trade from new production nearshored to the Americas and to garner a larger share of the growing U.S. export pie.
Global supply chains will be impacted, but the impact may take a while to be felt. The multitude of variables that affect trade flows will make it challenging to predict which commodities, industries, trade routes and countries will be impacted, but therein lies the opportunity for ports.