By Mary Branham, CSG Managing Editor
When Victor Smith was running a manufacturing company, he understood the draw to move some of his operation overseas.
“We got to China because our customers were demanding what were we going to do from a longer-term perspective to have low-cost manufacturing,” he said.
Now that he’s the secretary of commerce in Indiana, Smith understands the draw for some of those companies that were in the same situation to begin moving their operations back to the U.S.
“There are a lot of reasons why people are reconsidering their manufacturing strategy,” he said.
Smith ticks off a laundry list of reasons many companies are bringing jobs and manufacturing back to the U.S.—the potential for damage to the product during shipping, skyrocketing wages in China and the rest of Asia, the cost and reliability of energy, and the blatant theft of intellectual property in China.
States are working to position themselves for attracting these reshoring industries, and Indiana sits near the top of the lists of states leading the U.S. manufacturing resurgence. Area Development, a magazine that covers site selection and relocation, ranks Indiana number one for manufacturing’s share of nonfarm employment, number two for manufacturing’s share of gross state product and number seven for the number of manufacturing jobs overall.
Smith attributes that to the state’s location—it’s right in the heart of the Midwest—as well as a good fiscal environment that’s inviting to businesses and a workforce that has “a good reputation of an honest day’s work for an honest day’s pay.”
Those attributes, he believes, will position the state well in attracting some of the jobs that are coming back to the U.S.
States should consider the efforts to pull U.S. companies back from overseas the same way as the efforts to draw foreign investment, said Harry Moser, who founded the Reshoring Initiative, an Illinois-based nonprofit that works to bring manufacturing jobs back to the U.S.
“The same motivation that drives foreign direct investments drives the reshoring efforts,” said Moser. He’s working with several states in their efforts to build the infrastructure necessary to attract these companies.
Moser said the number one reason for reshoring is the increased costs as wages in Asia rise. For the past decade, he said, Chinese wages have risen 15 to 18 percent a year and are expected to climb even higher because of China’s one-child policy resulting in a drop in the workforce by about 3.5 million people per year.
“The workforce is declining at the same time the standard of living is rising,” Moser said.
Low wages in China were a big factor for companies offshoring manufacturing years ago. But Moser said many companies failed to look at the total cost of overseas operations. They ignored as many as 25 cost factors because the wages were so low, he said.
“Now that (Chinese) wages are getting higher, you don’t have that huge wage differential to hide behind,” he said. “Those other factors become increasingly more important.”
Energy costs, for example, are becoming more important now. When companies first started offshoring, oil was cheaper than natural gas, making transportation costs cheaper than energy costs to power manufacturing plants in the U.S. That has changed dramatically in the last few years.
Bringing Jobs Back
Companies are taking notice. Moser has found through tracking companies bringing jobs back to the U.S. that about 120,000 jobs have been reshored since 2010. In addition, Moser said balance has been restored between the number of jobs lost to offshoring and those created by reshoring. He pointed out that in 2003, about 150,000 jobs moved overseas at the same time 2,000 jobs were brought back to the U.S. By 2013, 30,000 to 50,000 jobs were lost to offshoring, while 30,000 to 40,000 jobs were brought back to the U.S.
“We’ve stopped the bleeding,” he said. “We are no longer net losing jobs to offshoring.”
Moser said the challenge for him and others is to start bringing back 100,000 jobs a year and that will take time.
But Sujit CanagaRetna, senior fiscal analyst for The Council of State Governments’ Southern Legislative Conference, doubts the manufacturing sector will ever get back to what it was in its heyday.
While manufacturers like GE, Whirlpool, Apple and Ford are bringing some jobs back, efficiency and technological gains have cut the number of people needed to produce those products.
“You cannot romanticize manufacturing as being this great savior and that we’re going to have tens of millions of jobs in manufacturing one more time,” CanagaRetna said. “There are all these enormous efficiency gains, technology gains that we are now able to produce more manufacturing output with way fewer employees at these 21st century manufacturing facilities.”
Manufacturing reached its high point as a percentage of gross domestic product in 1993, when it accounted for 28.3 percent, CanagaRetna said. It’s been gradually declining and fell to as low as 11 percent of GDP in 2009; it rebounded to 11.9 percent in 2012 from 11.5 percent in 2011.
“It doesn’t sound like a lot, but when you’re talking about a $16 trillion economy, that little percentage is a pretty serious number,” he said.
So it’s no wonder that President Obama and state officials across the country have been touting the benefits of reshoring, he said.
Some businesses, like Walmart, are doing their part to push the “Made in the USA” label once more.
Walmart has announced a $10 million fund to promote American manufacturing in a public push to sell more American-made products. The fund will award grants to companies to develop new manufacturing processes. That’s in addition to the company’s decision to increase sourcing of American-made products by $50 billion over a 10-year period. Not only will Walmart buy goods already made here, but it also will help bring production back to the U.S.
In some cases, the need for increased manufacturing comes from proximity. The fall in natural gas prices has produced not only lower costs for energy, but also lowered costs for the offshoot manufacturing associated with natural gas, like producing consumer goods such as plastics and rubber.
Mark Mills, a senior fellow with the Manhattan Institute who studies energy issues, said the natural gas boom creates three or four jobs for every job related to drilling, transporting and refining.
“These are sticky jobs,” Mills said. “They’re not jobs that are easily outsourced somewhere else. They tend to be jobs that occur in and around the counties in which the work is going on.”
In addition, chemical manufacturers have seen a resurgence because the byproducts from natural gas are cheaper and production costs are lower in the U.S., according to Martha Moore, senior director for policy analysis and economics at The American Chemistry Council. She co-authored a report in May 2013 about new U.S. chemical industry investment because of the increased production of shale gas.
“Because of shale development, there’s been a huge surge in the availability of ethane supplies, and that continues to grow,” she said.
The ethane molecule is important to the U.S. chemical manufacturing sector, she said. It’s part of the feedstock—the raw materials—used for making the chemical products that are used in 96 percent of all manufactured goods, including cosmetics, electronic products, pharmaceuticals and plastics, according to the report.
While the U.S. chemical industry uses ethylene from natural gas liquids, like those found in the Marcellus shale fields in the Appalachian region or the Eagle Ford formation in Texas, the rest of the world uses a much more expensive oil-based feedstock.
“This obviously presents a huge competitive advantage for U.S.-based chemical makers,” Moore said. “It’s been the driver for a huge wave of announcements in the petrochemical sector.”
The report cut off data last March, but the American Chemistry Council has continued to track the investments. By late January, Moore said, more than 140 chemical projects with an investment value of close to $100 billion over the next decade have been announced in the U.S.
That’s a huge turnaround from a decade ago.
“Ten years ago, natural gas prices were very, very high compared to oil prices, so U.S. petrochemical makers were in a pretty tough spot,” Moore said. “We’ve seen a complete reversal because of shale gas, because of these new supplies of ethane about to come online and the lower cost of natural gas.”
Mills expects that trend to continue, which makes U.S. investment more attractive.
“Energy is roughly a third to a quarter of the price here, as compared to many places around the world, and it’s very reliable,” he said. “We know it’s going to be there a long time.”
Like those plants that locate near the shale fields, bigger manufacturers tend to attract suppliers, building an ecosystem that would make it harder in the future for large manufacturers to leave, said Mills.
Companies often consider two types of reshoring, Mills said. Some will move back to a factory where it was located before it moved operations, while others will build a new factory. Mills said the Midwest typically gets midsize factories and those returning to a previous location. Southern states, which are typically nonunion, right-to-work states with lower wages, typically get the larger factories.
CanagaRetna, who wrote a regional resource brief about the resurgence of U.S. manufacturing, said the South also offers an efficient intermodal transportation network spanning railways, highways, airports and ports.
“These things are also a very important consideration when a company decides to relocate to a particular region, because they want to be able to ship the finished products out as well as get new parts and new products in,” he said.
He points out that while companies like the economic development incentives a state can offer, perhaps an even bigger draw is the quality and preparedness of the workforce.
“This is a critical component, because companies don’t want to locate to a city or state that has a very mediocre workforce,” he said.
Many states are working collaboratively with companies and two-year community and technical colleges to ensure a quality workforce, he said.
Smith, Indiana’s secretary of commerce, agrees.
“You have to start with the people,” he said. “The more we can educate the employment pool in a general sense, the better we all are.”