Moving back ashore

Airport baggage carousels can provide telling glimpses of what’s happening in the economy. In 2004 I was waiting for my bags with a guy who was coming back from South Korea. His company was moving its factory — including all the specialized equipment in it — from Massachusetts to South Korea because the South Koreans had the expertise to run it, and the firm would increase profits a penny a part, even with the cost of moving the equipment and training the South Koreans to make it all work.

By that logic, a lot of factories should start moving back to the U.S. now, or at least to North America. It turns out that expensive oil and a depressed dollar have whacked the easy financial windfall that offshoring represented for manufacturers.

The cost of shipping has tripled since 2000, according to CIBC World Markets. That rise affects both raw materials and finished goods. Meanwhile, wages in China have gone up 19 percent a year, narrowing China’s advantage over places like Mexico, and even the U.S. itself.  McKinsey notes in Time to rethink offshoring? (registration required) that it is now  more profitable to assemble televisions or build mid-range computer servers in the U.S. than in China, which was not true just three years ago.

The straight dollar costs of manufacturing are still lower in China, McKinsey acknowledges, but when costs like freight, shipping, inventory and returned goods  are figured in, the advantage of those lower manufacturing costs are wiped out, and then some.

So will we see a mass exodus of manufacturing from China? Perhaps not, McKinsey says. You have to look at all your cost factors, including the potential for higher productivity in Asian factories, where the skilled labor is, whether your organization is capable of running manufacturing anymore in the U.S., what the tax and transition costs will be, and other factors.  For instance, will the dollar continue its recent rise?  Will the price of oil keep dropping?

Such questions don’t have clear-cut answers. But one thing’s clear — you can no longer assume that China equals cheaper.

(I originally posted this as Offshoring Is So Over on Big Think)

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