There was a time when the decision to offshore manufacturing operations to an emerging market was an easy business decision. However, the past decade has many companies questioning that business model. Rising labor costs, uncertain supply chains, labor unrest and the costly and lengthy delivery time for manufactured goods coming from Asia has exponentially increased the cost to offshore manufacturing.
Between 2000-2010, Chinese wages increased an average of 15%-each year and the Chinese government will continue that policy until 2015. In 2008, Chinese law required permanent contracts for workers after one year of employment. Employment terminations of Chinese workers generally results in severance payments, in line with countries like France and Canada. The oversaturated job market makes it difficult to find qualified workers and leads to problems with quality. Strikes in China over the past three years have ended with substantial pay increases after pressure from the Chinese Government.
It isn’t just China either. Many other Asian or emerging countries increased worker wages and are passing laws to protect the rights of their workers. These workers are more aware of their rights due to social media. Pay for senior management in several emerging markets now matches or exceeds pay in America for the same jobs.
During the same timeframe, American real wages in manufacturing decreased and productivity soared, particularly in many of the Southern employment at will and right to work states. Interestingly, the threat of offshoring has kept manufacturing wages down in the U.S. Extracting natural gas from shale brought the cost of energy down in the United States, which makes manufacturing here even more attractive. Some analysts predict that by 2015, it will cost many companies as much to manufacture in China as it does in many parts of the United States.
As a result, many American companies are looking at whether they should bring some of its operations back to the U.S. The hard costs aren’t the only factor they are considering, American companies get a boost in public opinion when they reshore their operations or choose to expand at home versus overseas. It is too early to tell how strong this reshoring trend will be but multinational manufacturing businesses will want to continue to monitor it.