Backshoring: Which Manufacturing Should Return to North America?


Do a few high-profile decisions to bring manufacturing back to North America, known as Backshoring, mark the beginning of a new trend?  It may be according to strategy+business, a Booz&Co. newsletter, and some savvy firms are leading the way. For example, NCR has decided to return production of its most sophisticated ATMs from Asia to Georgia, citing the need for production to be closer to its innovation center and customers.  In another decision, GE CEO Jeffrey Immelt recently announced that his firm will be repatriating production of hybrid batteries and advanced water heaters from China back to the US. 

Some modest corporate moves do not herald a reversal of offshoring, one of the most popular corporate strategies of the last 20 years. However, the business case for offshoring has changed and recent developments should catalyze executives to consider backshoring for high value products.  Here’s why.

Labor cost is not as critical as it used to be.   In many capital & innovation intensive industries like cars, healthcare and aerospace, the proportion of labor to total costs has been steadily decreasing to, in some cases, no more than 10% of total delivered cost.  As a result, the need to produce in the least expensive labor market has ebbed. 

Asia is not as inexpensive as it once was.  Due to rising compensation rates and exchange rate changes, many regions of China and India now feature similar labor rates to what you would find in many parts of North America.  Moreover, skilled worker turnover rates and labor productivity in many Asian regions are often worse than what you will find in North America.

North American manufacturing continues to maintain some natural advantages versus Asia.  Backshoring allows manufacturers to improve product delivery times (by shrinking transit distance), minimize management costs (by reducing travel expenses) and cut transportation charges (by eliminating oceanic transit).  

Other Asia-related costs have risen dramatically.  Key input costs like transportation, office and insurance have increased substantially due to oil price increases, soaring real estate and piracy risks.  Furthermore, key raw material costs (e.g., plastic, steel) have risen precipitously over the past couple of years.  Finally, the reliance on a few Asian and North American transport hubs has multiplied supply chain vulnerability due to potential security concerns, union problems and capacity constraints.

Tight links between customers, R&D and production is more crucial today.  As was the case with NCR, designers and customers in industries such as medical diagnostics, telecom and IT want manufacturing close by so they can more easily collaborate on product design, testing and integration. For perspective, leading Japanese manufacturers learned this lesson early in the 1990s and now rarely offshore anything but commodity products.  

Offshoring remains difficult.  After many years of offshoring, savvy executives have discovered that for many products, the drawbacks of outsourcing outweigh the benefits.  For example, certain issues like IP protection, management control and organizational integration are often too problematic with offshore production.  For low revenue products or with smaller firms, it may simply be less hassle in the long term to backshore.

There is no doubt that overseas production will continue to deliver superior savings for many labor intensive, low value-add products, especially when companies are manufacturing for the local market.  However, when considering where to manufacture high-value, innovation-driven products, the business case for backshoring is looking increasingly more compelling.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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1 comment so far

  1. Bar Fridge on

    ;;’ I am really thankful to this topic because it really gives up to date information ~.”


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