Bringing It All Back Home: Why It Makes Sense To Manufacture In The USA

April 7th, 2014

In order to understand why “re-shoring” makes sense, you’ve first got to understand why off-shoring made sense. Off-shoring (along with “downsizing” and “rightsizing”- probably two of the most despised terms in business) began in earnest in the 1980′s, due to reforms made by the Chinese government, beginning in 1978. Those reforms took time to take root, but once they did, it changed the game in big ways.

The Rise of China

By selectively embracing Capitalism, China sought to replace the USA as the “Workshop of the World” in much the same way that the United States once took that title from England (at the start of the Industrial Revolution, England had more machines per capita than anyplace else on the planet, and it was this fact that led to their early industrial dominance).

China simply took a page from the history books and made use of their two biggest advantages; lots of people, and an artificially undervalued currency. The first advantage meant that China had the people power to invade nearly any market it wanted. They could throw enough bodies into the fight that they could dominate nearly any field they entered. While the United States was busy investing in high tech robotic assembly lines, China did it old school, with vast factories that could churn out an astonishing array of goods and services for pennies on the dollar. The second advantage (the government intentionally keeping the value of Chinese currency low as compared to the rest of the world), meant that for decades, China enjoyed an impressive 8:1 currency advantage over the United States.

It doesn’t matter how good you are, you’re going to be hard pressed to overcome an 8:1 advantage, and that’s why companies started leaving.

Cheap Oil

The other factor that sealed the doom of American manufacturing was the abundance of cheap oil. That drove down shipping costs, which led to a huge increase in cargo traffic from the far east. Remember that this began in the 1980′s, so we were just coming down off the historically high prices of the 70′s oil shocks, and for the next two decades, oil prices would remain remarkably low.

The one-two punch of incredibly (and artificially) cheap labor in China, and to a lesser extent, India and Mexico, combined with cheap oil which translated into cheap shipping just made it impossible for American manufacturing to compete.

Things Are Changing

Recently, however, there’s a nascent movement to bring manufacturing back to the US. This is being driven by three things.

1) China’s currency is finally beginning to rise. Remember the 8:1 advantage I mentioned earlier? It has now shrunk to about 3:1. That’s still a big hurdle to overcome, but it’s not impossible. It puts American workers back in contention.

2) Oil prices are rising. The era of cheap oil is over. China, and again, to a lesser extent India and Mexico, were the victims of their own success here. As they became manufacturing powerhouses, their own oil demands increased, both to fuel their industry, and because they created a growing consumer class in their own countries, who suddenly demanded things like cars and central air. A finite supply of oil meets a growing demand, and the result is higher prices per barrel. This shift in reality suddenly made it a lot less attractive to ship product from far away.

3) The emergence of 3d printing. Design has always been an American strong point, and now, the technology exists to create products for a market of one. Perfectly customized products printed locally, on demand. Why wait two weeks to get something from China if you can pop down to the corner store and have a better product, customized for you, in much less time?

Combine those three factors, and what do you get? An American manufacturing renaissance!

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