30 Jun 2015 18:32 IST

Manufacturing returns to the US

If you are thinking of engaging with a US manufacturing business, this is a good time. 

After two decades of outsourcing, the US is rediscovering the virtues of insourcing

About a year ago, a colleague and I were amazed at the panoramic view one could get from the observation deck of the Petronas Twin Towers in Kuala Lumpur. The expensive homes dotting the Malaysian hill country beyond, the gleaming office buildings and flowing highways nearby cemented an impression first created a few days earlier: Malaysia is a wealthy economy.

It is also a manufacturing powerhouse. The production of high-end electronics, chips, cars and heavy equipment could make the country a fully developed industrial nation by 2020. Its GDP (gross domestic product) per capita is seven times higher than that of India, a G-20 nation and yet, the average person struggles to complete a sentence in English.

Manufacturing matters and matters big, as PM Modi repeatedly says when he promotes his Make in India message. But the US realises this fact too. ‘Insourcing’ – a play on the word outsourcing – is helping the country rebuild its storied manufacturing legacy. President Obama announced last year that North Carolina State University would lead a consortium of 6 universities and 18 companies to set up an advanced manufacturing institute devoted to high technology manufacturing.

Just two decades ago, the emphasis was all on outsourcing. The conventional wisdom then was that the US, with its brilliant applied R&D labs and marketing prowess would complete a product’s bookends – design, marketing and sales, and countries with cheap labour would complete the middle pages (i.e. manufacturing) in a far-flung global supply chain framework that was optimised. This approach was after all what resulted in making China an economic superpower.

So, what changed?

For one thing, the US has developed a significant advantage in energy. US natural gas prices are about a quarter of what they are in other parts of the world. The US is already a net energy exporter and its shale oil production is credited with upsetting the supply/demand balance in oil markets which have helped bring fuel prices down everywhere.

Second is the concept of vertical integration – that is, getting a single location to do all the elements of the product value chain. When you have product designers, tool engineers, manufacturing technicians, marketing professionals and quality control specialists all working together under the same roof, feedback from the shop floor is practically instant. Say that there are kinks in the manufacturing process caused by faulty design of a part. The design team can quickly provide a remedy and the assembly line could be using new re-designed parts in just a few days – possible because of advances in 3-D printing.

Cheaper dollar

Third is the role of the US government and the unintended consequences of its policies. As the Federal Reserve continues to print money to help encourage domestic growth, there is an abundance of dollars in world markets. In 2008, one US dollar could buy nearly 7.50 Chinese Yuan. Today, the same dollar can buy just 6.19 Yuan. For a US company, it’s nearly 20 per cent cheaper to produce in the US than in China based on currency devaluation alone -- and with margins as tight as in manufacturing overall, the 20 per cent savings may well be a decider.

Also, wage inflation in China – the world’s factory – is becoming a major issue. According to Forbes, Chinese wages have been rising at an average annual rate of 14 per cent during the past decade. “China's manufacturing fell to the lowest level in nearly a year as new orders shrank,” reported AP in March.

Fourth is the way US states have stepped up incentives, tax breaks and the offer of even free land to companies building US factories. Companies have a big reason now to invest in US manufacturing plants rather than outsource.

Insourcing’ as a trend

General Electric and Apple are examples of companies expanding their existing manufacturing lines in the US. Other companies leading this wave, according to Inc. magazine, are Otis (in South Carolina), Buck Knives (Idaho), Caterpillar (Texas), and Coleman (Kansas). Time magazine, in an article in its April 22, 2013 issue, reported that the average wages of a worker in modern US manufacturing are $77,060. Not bad for an industry that lost nearly 60 per cent of its workers since 1979 to outsourcing, attrition and layoffs.

If you are thinking of engaging with a US manufacturing business, this is a good time. There are likely to be plenty of opportunities in various fields related to high tech manufacturing fields including robotics, advanced manufacturing software, automation, specialised materials and 3-D printing.

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