"Near-shoring" is a clear and continuing trend, according to the latest Manufacturing Outlook report from AlixPartners. Companies located in developed markets are gradually shifting some production closer to their consumption bases.
The trend precedes the political climate that characterized the 2016 presidential campaign and continues under the current Administration, placing a huge onus on American companies that make their products outside U.S. borders. The main driver isn’t politics; it’s economics. Rising factory wages in China, coupled with the risk and cost of maintaining long supply lines, have caused manufacturers to begin searching for plant capacity closer to home.
Faced with the furor of President Trump, some companies have sought to spin their ongoing efforts at near-shoring as expressions of patriotism. But even as they seek to remain in the President’s good graces, they are coming to realize that reshoring and near-shoring are more than a matter of changing the address of a plant.
Big multinationals tend not to act in haste. Their boards want to know exactly how a move is going to impact top-line costs and bottom-line profits. They’re keenly aware of the need to have a viable strategy that lays out both one-time and ongoing expenses, says Foster Finley, managing director of AlixPartners. Most of all, they’re determined not to take any steps that will disrupt their complex and carefully crafted supply chains.
The shift in sourcing is undeniable. In the AlixPartners report, 69 percent of the senior supply-chain, logistics and manufacturing executives surveyed said they consider near-shoring “a possible opportunity” to meet growing consumer demand in the U.S. and Europe. That compares with just 40 percent in the previous year’s survey. In addition, more than two-thirds have near-shored some production in the past three years, or plan to do so in the coming three.
But complications abound. One potential barrier to a successful shift in sourcing is a shortage of labor. Considering that the political aspect of the issue has been focused almost exclusively on jobs, that’s distressingly ironic. According to the AlixPartners report, “not all local labor markets are sufficiently deep to meet rising demand.” The U.S. and other developed countries lack the talent to fill key manufacturing roles such as process and product engineers, line operators, and front-line supervisors.
AlixPartners believes the skills shortfall will persist, even with steady economic growth and rising consumer demand. The firm cites a finding by the Manufacturing Institute that, through 2025, the U.S. will need to fill 3.4m manufacturing jobs, at least 2m of which will go unfilled.
“Those shortages may lead to higher-than-expected labor costs, reliance on contractors or temporary labor, and other ramifications that could make near-shoring less attractive for labor-intensive manufacturers going forward,” AlixPartners says.
Companies are seeking solutions. More than 60 percent said they are working with local education providers to raise skill levels, while 55 percent are boosting wages to entice more candidates, and 53 percent have launched internal apprenticeship program. At the same time, 48 percent are relying on temporary labor to fill the gap in unskilled-labor shortages — hardly a cost-effective, long-term solution.
The biggest wild card in the deck, however, is automation. Manufacturing plants in the U.S. and abroad are embracing robots and other automated systems to reduce the need for humans on the line. Many consider the move essential to making local production economically feasible. In a number of instances, that can mean the creation of facilities run almost entirely by machines.
In the AlixPartners survey, two-thirds of respondents said they plan to invest “a significant portion” of future capital in robotics and automation technologies. “All trends point to increased automation among North American and European manufacturers for the foreseeable future,” the firm says. Here again, a painful irony: actions that were supposed to benefit domestic workers end in producers minimizing their use. So much for the idea that near-shoring will be a boon for the under-employed American worker.
Like any technological advance, the loss of jobs in one sector often leads to an uptick of hiring in another, with the latter offering higher pay in exchange for higher skills. Again, though, companies are having a tough time finding the people who can design, run and maintain the more sophisticated production systems.
So while near-shoring and reshoring are clear trends, don’t expect them to trigger a return to the days of labor-intensive plants with production-line workers making $20 or more an hour. Much unskilled production will continue to be done offshore, since it pays wages that would be unacceptably low to an American worker. The more sophisticated facilities will employ far fewer humans than in the past, and even those operations will be challenged to find enough highly skilled workers for the positions that are available.
Finally, notes Finley, there’s the question of where future demand will be. Many producers are reluctant to place big bets on continued, long-term growth in the U.S. economy, and are instead looking to Europe, Asia and South America for future possibilities. Under such a scenario, “near-shoring” comes to mean something quite different for the American worker — a curse rather than a potential blessing.