Short Read

Bringing it Home: The Rise of Onshoring

Moving manufacturing jobs out of the US in search of lower labour costs dates back to the 1960s when several firms extended operations abroad to Mexico and China. Despite the increase in transport and shipping costs this caused, labour costs were reduced by up to 50% – thus supporting the case to offshore labour. The years to come would see further technological improvements in the transport elements of the supply chain as well, and with it the cost of shipping soon decreased too. For example, shortly after the uptake of container transport following its advent in 1956, ship loading costs per tonne plummeted from $5.83 to just $0.16.

Advances in communication technologies and improved access to educational opportunities abroad meant that the benefits of offshoring would not be confined to just the manufacturing sector.  Labour forces in countries such as China, India, the Philippines and Malaysia became more skilled, just as the cost of communicating with them was falling. This led to the offshoring of jobs from the West in the tertiary sector, like IT and financial management, thanks to these burgeoning pools of university graduates. Although foreign labour costs rose for multinationals, it was still more profitable to employ overseas workers than domestically trained ones. For instance, in 2003 a computer programmer in Calcutta only earned 13% of the wage of his similarly skilled contemporary in San Francisco.

Hence, by the turn of the century, the attraction for companies to offshore both blue and white collar jobs had become irresistible. In 2004, general estimates were made showing that between 250,000 and 300,000 jobs on average had been leaving the US every year over the last 10 years. Further projections that year hinted that some 14 million Americans, 10% of the country’s labour force, held jobs that could potentially be offshored. 

Since then, offshoring has developed into a fairly polemic issue, most noticeably fought on political battlegrounds. For example, in the US presidential elections of 2012, Barack Obama accused Mitt Romney of offshoring thousands of jobs when Romney used to work in private equity. Romney himself then went on to criticise the car company Chrysler for its plans to begin manufacturing Jeeps in China. In fact, a survey carried out by the Wall Street Journal in 2010 declared that 86% of Americans thought that offshoring jobs to low-wage locations throughout the world was a leading cause of the country’s economic problems. Thus offshoring became a dirty word and a topical issue which politicians could use to their advantage to garner votes.

There is no better example of this than Donald Trump’s 2016 bid for presidency  which was able to play upon these fears. His infamous campaign slogan, “Make America Great Again”, principally appealed to the so-called “left behinds”: white, middle-aged, working-class men who spent most of their lives eking out a living in America’s heartland – the exact demographic who have been hardest hit by offshoring of labour. Now in power, having run on an ‘onshoring’ crusade for the presidency, Trump’s tariffs on imports from China, Canada and Europe aim partly to undo the process of offshoring by encouraging companies to manufacture more within the US. 

There is no doubt that onshoring, has been on the rise recently for political reasons. Yet there are also several compelling economic arguments for the practice.

First, the relative cost of labour isn’t as low as it once was. Between 2000 and 2008 real wages in Asia rose by 7.8% per year, according to the ILO. In the same period of time, pay in advanced economies only rose on average by 0.9% per year. Moreover, there is now greater regulation and care for workers in Asia. For instance, Foxconn (famed for manufacturing Apple products) doubled pay at its Shenzhen plant following a series of suicides, whilst Honda gave its Chinese workers a 47% pay rise after strikes in 2010. Hence, such advances in pay and workers rights in developing economies have cancelled out some of the previously held cost benefits of manufacturing abroad.

Second, there are issues with the supply chain, given how complex and convoluted it can be. This is why Adidas opened two “Speed factories” in 2017 – one in Bavaria and the other in Atlanta. These factories are three times faster and more flexible than Adidas’ Asia plants, thanks to the technology they use. The whole process is highly automated, where robots, knitting machines and 3D printers work in tandem to create the perfect product. By shortening the supply chain many times over, once the trainer design has been finalised, the final product can end up in stores in less than a week (sometimes even one day), compared to the average 2-3 months it takes when manufactured in Asia. As the production process becomes increasingly automated thanks to technological innovation, the benefits of cheap offshored labour are negated; thereby bringing the advantage back home.

Adidas isn’t the only firm who has made the decision to onshore. Companies such as General Motors, Boeing, Ford and Intel have all started to onshore to the US recently, whilst brands such as Gtech and Clarks have made a similar transition to the UK. 

Nonetheless, the reality is that western companies will continue to offshore for the foreseeable future. Adidas’ CEO Kasper Rorsted announced, “I do not believe, and it’s a complete illusion to believe, that manufacturing can go back to Europe in terms of volume.” One possible reason for this could be due to booming consumer demand in Asia. With China’s middle class forecasted to rise to a third of its population by 2030, firms’ ease of access to these growing markets is also important to consider.

Yet the lure of onshoring jobs promises to grow as firms become more open to the increased quality, certainty and speed of delivery that can be achieved with superior technology and closer proximity to the manufacturing process. Additionally, as proven by Trump (as well as some European populist governments like Italy) bringing jobs home can buy votes and political support. Are we set to see a wave of job repatriation around the world? Only time will tell.

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