Harry Moser – Founder and President, Reshoring Initiative
The United States has gone from being the world’s manufacturing colossus for all products just after WWII to being unable to produce Personal Protection Equipment (PPE) timely to deal with the COVID-19 crisis.
In the mid to late 1940s, the nation produced half of the world’s manufacturing output, much higher than the 28 percent that the world’s factory, China, produces today. Currently, at least half of what we consume in the United States is imported, with major supply chain gaps such as PPE and rare earth minerals. This is the first of a series of articles that cover:
How did this trend occur?
What success has the United States had since 2010 in reversing the decline?
What needs to be done to restore self-sufficiency, to reestablish U.S. supply chains?
How can companies engage and benefit?
After WWII, U.S. dominance was based on a huge build-up for the war and on other industrial countries having their production capabilities destroyed in the war. The nation’s trade surplus declined to zero by 1979. The United States sacrificed its manufacturing economy initially to help the rest of the world recover from the war and then to help low-income nations achieve democracy and middle-class status by exporting to the United States on preferred terms. Unlike competitor countries, we failed to establish an industrial policy. In fact, we have effectively had a de-industrialization policy consistently taking actions that undermined U.S. manufacturing. As a result, we have experienced increasing goods trade deficits since 1979, recently averaging about $800 billion per year.
The U.S. manufacturing cost is a driving force behind the trade deficits; thus, the Free Carrier Agreement (FCA) or Free On Board (FOB) price has been 20 percent higher than in other developed countries and 40 percent higher than in developing countries. We have not been competitive, so companies sourced offshore to meet consumer and industrial demand for low-priced goods.
Fortunately, a positive localization trend since 2010 indicates an increasing rate of reshoring by U.S. companies and Foreign Direct Investment (FDI) by foreign companies, peaking at 190,000 jobs per year in 2017.
This positive trend has been driven by: rising Chinese wages; U.S. automation and lean efforts; and companies rethinking their sourcing metrics. Companies can rethink sourcing metrics by using Total Cost of Ownership (TCO) instead of FOB or FCA price or landed cost. A landed cost is the total charge associated with getting a shipment to its destination.
The TCO Estimator is a free online tool that helps companies account for all relevant factors — overhead, balance sheet, risks, corporate strategy, and other external and internal business considerations — to determine the true total cost of ownership. Using this information, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors.
Universal use of TCO, alone, would gradually reshore 20 to 30 percent of what is now imported. This positive trend has been strong enough to offset continued offshoring and thus stop the trade deficit’s growth but not reduce it. If the United States manufacturing industry eliminated the trade deficit, it would result in a 40 percent increase in manufacturing, engaging five million more manufacturing employees.
The United States needs to double the rate of reshoring and FDI to achieve the goal in 20 to 30 years. The biggest obstacle is to increase skilled and unskilled manufacturing workforce. However, some experts are predicting shortfalls of two million or more due to weak recruiting, relative to high rates of retirement. Achieving the goal will take decades.Now is an especially good time for companies to reevaluate the choice of domestic vs. offshore production.
All segments of society need to reengage:
Consumers: Seek out and demand Made-in-USA products.
Educators: Encourage STEM studies and programs that prepare young people for careers in advanced manufacturing, one that requires high-tech skills, such as programming, engineering, and digital competencies. Work closely with local manufacturers to develop skills needed.
Retailers: Make Made-in-USA products accessible.
OEMs/branded product companies: Reevaluate offshoring using TCO. Invest in skilled workforce and agile manufacturing.
Contract manufacturers: Use TCO as a sales tool to compete with imports. Invest in workforce and automation.
Technology suppliers: Identify your products that can make U.S. manufacturers competitive. Sell more by helping customers reshore.
Communities and states: Shift resources to advanced manufacturing skills training. Attract foreign suppliers to fill supply chain gaps.
U.S. government: Implement an aggressive industrial policy. Maintain immediate expensing of capital investments. Shift promotional efforts and resources from producing liberal arts graduates (consistently about 25 percent of these graduates hold jobs that do not require a university degree) to apprenticeships and engineers. Lower the USD (U. S. Dollar) moderately. Implement a VAT (Value Added Tax). Drive innovation and require that the innovated products are produced here.
The Reshoring Initiative® provides a broad range of tools and services and advocacy to help implement many of the above actions.
To read more in Harry Moser’s Rebuilding & Reshoring series, click here.
Free Carrier Agreement (FCA) – Seller delivers the export cleared goods to the carrier at the named and defined location mentioned in the contract. From this point, buyer takes responsibility.
Free on Board (FOB) – Seller delivers the goods on board the vessel at its own cost. The buyer is responsible for the rest of expenses and risk of on carriage to final destination.