Return of the native: Onshoring

Once a Mecca for low-cost sourcing, now a growing blot on the budget sheet; China as an offshore destination appears to be losing its shine - for some.


For the past two decades or so, China has become the go-to place for cheap labour and generally low-priced production. The country now accounts for a fifth of global manufacturing. According to the US Journal of Commerce, in the first quarter of 2011 goods from China accounted for 45% of the USA’s total imports of container cargo. However, this was a year-on-year drop of 1%.

The rising costs of manufacturing in China have been well documented. The National Bureau of Statistics says that the average wage for Chinese urban workers at ‘non-private enterprises’ – including state-owned companies and foreign-funded firms – rose by 8.5% in 2011 when adjusted for inflation. Wages for workers at private enterprises rose 12.3% on a similar basis. Apple has recently been the subject of media scandal regarding its treatment of workers at its third-party manufacturers in China, prompting it to promise shorter working hours and better pay.

Fuel costs and surcharges are on the up, and the cost of shipping containers from Asia has frequently risen so far in 2012. Chinese newspaper The People’s Daily recently reported that the cost of transporting freight from Shanghai to Rotterdam, the Netherlands, increased 114% in one week earlier this year. 

A recent Manufacturing Reshoring and Nearshoring Outlook Survey by AlixPartners predicted that if China’s wages continue to increase 30% annually and if currency and shipping costs were to rise by 5% annually, by 2015 it would cost the same to manufacture many products in the US as it would to make them in China and ship them.  

It seems the trend to jump offshore could be turning to a leap to return onshore. David Kaufman, VP and General Manager of Block, which manufacturers money handling and security products, has observed this trend in the OP industry. He says: “A combination of factors including the rising costs of labour, rising fuel costs and scarcity of containers has made every importer of goods in our industry look at alternatives. The gap between doing it there and doing it here is narrowing.”  

Everybody out

“Product sourcing is about striking a balance between speed, quality, and pricing, to meet the exacting demands of consumers,” said the opening to a KPMG study called Product Sourcing in Asia Pacific. “It is a fascinating business and we are at a decisive time in the history of sourcing.” The study explains that it “is clear that some sourcing activity has moved closer to end markets over the past three years”.  

Doug Skeggs, Marketing Director at Tulip Innovation, says: “Clearly the trend is moving back to onshoring. 15 years ago my business partner was in Asia every two months for quality inspections and shows – not any more in these days of looking at overall costs. The whole value chain has to be revisited. On many low margin items, which the OP industry has in abundance, it appears the cost savings are diminishing these days. But the change is slow in OP.”

As Skeggs says, the focus on purchase or production price has shifted to a focus on entire sourcing costs. These include currency fluctuations, the costs of sending employees over to Asia to set up and monitor business, the costs of protecting intellectual property or the costs created by language barriers. 

Block’s Kaufman agrees. “The total cost of direct import has always been fuzzy,” he says. “You have purchasing people looking at the purchasing price, which is attractive in Asia. Now you have people looking at the total cost of that Asian relationship and you have two different numbers. Going back to the gap between doing it there and doing it here, as this narrows that whole value proposition gets higher up in a company and maybe someone at the chief operating level looks at it.”

Some companies have been on the move for a while. Block has moved some of its production back from China to the US. Kaufman explains: “We used to produce cloth and vinyl bank bags in China, for example. Now we buy the material in China and import it to Mexico where we assemble the product. We have a no-duty border to Mexico from the US.”

Ron Berg, SVP Supply China for United Stationers, which sources a significant percentage of its private brands in China, has a similar story. “The rising costs in Chinese labour and general increases in fuel are driving higher landed costs of these import items… We have altered our sources and in some cases moved production back to the US where it makes sense from a financial and partnership perspective.”

A less tangible cost to consider is speed to market. 20 years ago, in an era without the internet, speed wasn’t always as crucial a factor. More resellers worked from a stocking model, but the economic uncertainty has influenced more to stock products on a just-in-time basis. And customers are far less willing to wait three to four weeks for a product to be shipped across oceans given today’s speed of business. Moving production closer to the end-user also has the added bonus of tapping into consumers’ environmental concerns and a growing desire to ‘buy local’

Esselte in Europe has just moved some sourcing back to a more local base, partly for this reason. Cezary Monko, EVP and President of Esselte Europe and International, says: “We moved the sourcing of some plastic components from China to Poland due to proximity to our Polish plant, higher flexibility, competiveness and technical skills…The proximity to our European markets is a strong competitive edge, in our view.”

“You need to look where the customer base is,” says Jim Lewis, EVP Chief Supply Chain Officer at Fellowes. “For example, our big customer base for our Bankers Box is in the US. This is the centre of gravity for the product need so regional manufacturing makes sense.” 

Another lure for manufacturers in the US worth mentioning is that President Barack Obama has proposed tax incentives for companies that move their overseas operations back to the US, and penalties for those that don’t. Manufacturing in the US also opens doors for selling to the government – a hard customer to turn down.

The rise of robots

Fellowes found itself in a unique situation regarding onshoring. In 2009 its joint venture partner cut off the supply of its core line of shredders, and the company was forced to start from scratch for much  shredder production (see ‘Fellowes: the road to recovery’ in OPI #220). While re-establishing a wholly owned production site in China, Fellowes chose to relocate production of its higher-end shredders to the US.

“We thought it best if we divide and conquer from a project perspective,” says Fellowes’ Lewis. “We physically could not bring everything up all at once within one factory location due to human resource and supplier constraints, so we chose the parts of the product line that made the most sense to move back to the US. We certainly recognised the challenges of rising costs in China.”

Fellowes took a holistic view of the production process, says Lewis. The company now sources parts from near its headquarters in Illinois, US, and assembles the shredders in its own facility. This gives the advantage of increased control over processes, as well as increased IP protection. 

When asked if the cost of manufacturing these shredders is higher in the US the answer is a firm “yes”, but, says Lewis, echoing the words of other executives, “the gap in cost is narrowing”. He explains: “For the shredders we make back in the US, labour is a smaller percentage of cost, which is what the advantage is typically in China. These shredders are big products so there are high shipping and distribution cost considerations to account for. 

“Also, we found a lot of capable Midwestern manufacturers and suppliers built around the automotive industry, and when you think about what our machines are composed of there’s a big opportunity to engage with competent suppliers that want to onshore themselves.”

Rising costs in China aside, for some producers the lure of technology is a driver for bringing production home. Compared to the 1990s when manufacturing was an extremely labour-intensive activity, more processes can now be automated, and after the initial set-up costs, the cost of running machines varies much less depending on location.

One source told OPI how several OP manufacturers in China have gone bust recently – in particular Essentials Industries, which supplied a large amount of paper-based stationery items to the US and went out of business in late 2011/early 2012. Increased automation and investment in equipment from manufacturers in Europe and the US meant that they could no longer compete on price, when rising costs were taken into account. 

Skeggs has also observed this trend. He says: “Certainly in low-cost consumables where its machinery and not labour that counts we see instances in the west where manufacturers compete very favourably with Asian sources on both price and quality tolerances,” he says. 

Digging deep

There are still reasons to keep production in China. Labour costs are rising but they’re still low and, crucially, re-establishing production in a new location would take significant investment that many manufacturers just aren’t prepared, or able, to commit. 

“Many of the major suppliers have such enormous infrastructure for sourcing in Asia that it would be heresy to suggest to some that a project on nearshoring or onshoring would make sense,” says Skeggs. 

Certainly there is the question that since the mass manufacturing exodus in the 1990s, does north America or Europe have the infrastructure, skills, suppliers and raw materials that are required to produce these products anymore? Having become a hub for manufacturing, China has also become a place where anything can be sourced, for any purpose. 

Avery Dennison is one vendor that is maintaining its production in Asia, according to its VP Supply Chain and Operations for Office and Consumer Products in North America, Ron Briskie. The organisation has never sourced much from Asia – “a low double digit percentage” says Briskie – but what it does produce there is mainly because there are not “the competencies to make the products domestically”. 

“We have increased outsourcing to Asia as we have carried out more product innovation,” says Briskie. “We’re now making a wider range of products and we don’t necessarily have a single product that justifies the investment in equipment we would need to produce it domestically. In many cases we disposed of the equipment in the US so it makes no sense to bring production back.

“Certainly we have had to contend with cost increases in China, and this challenges us everyday. We aren’t exactly in an environment where we can raise the prices for consumers in order to recover costs! So we have been more selective with suppliers, with how we design products in the first place for cost efficiency, and we consolidate freight from multiple sources and so on.”

Many businesses that are considering offshoring production are still looking towards China, and there are those who still see opportunities to save money. For example, last year Spicers UK & Ireland established a sourcing office in China for its 5 Star brand.

Alan Ball, the wholesaler’s CEO, says: “We recently sent an RFQ to companies in Poland, Turkey and China for manufacturing. For what we sent out we could save in excess of 20% in China to our existing 5 Star price. So what I buy today, I can have manufactured in China and delivered to my premises for plus 20% saving.

“You’ve got to dig deep. Historically, manufacturing was located in Shenzhen on the southern borders, but this is now overpopulated and rising labour costs and taxes have made that region very expensive. People are continuing to move north and west to find cheap labour; it’s there if you look.”

Ball believes that China has “another 20 years before it saturates” but also emerging economies such as Vietnam and Cambodia could be ready to provide cheap production and sourcing. In fact, some production is already there. “Go to most clothes shops, and Cambodia and Vietnam are where most things are being made,” says Ball. “When fashion goes somewhere it proves the concept, then tech will follow.”

KPMG’s study points to a similar trend. It states: “While many hard goods, ranging from consumer electronics to furniture, are still being sourced overwhelmingly from China, apparel and footwear production is widely dispersed and more mobile. Preferential trade terms have boosted exports from Cambodia and Bangladesh to the European Union (and also to China due to recent agreements between Bangladesh and China), while Indonesia has tended to be a more popular sourcing destination for Japanese and North American buyers… Countries in south and southeast Asia should continue to attract interest as China relinquishes its position as the world’s manufacturer of low-cost goods.”

As mentioned previously, for those US manufacturers that want to bring production closer to, if not to, home, Mexico is becoming a more attractive option. Some vendors are reporting labour costs that are comparable to China when total costs are considered, and of course there is that no-duty border. The study by AlixPartners found that 50% of C-level and other senior executives surveyed view Mexico as the number one choice for nearshoring. 

“While security and safety should remain an issue for any company doing business in Mexico, the perception of the situation today is generally better than it was a couple of years ago,” said Chas Spence, a director at AlixPartners. “As with doing business in Brazil or, for that matter, parts of Asia, caution should always be top of mind; but on the other hand, with the aid of the right kinds of advisors many companies today are employing Mexico as an attractive alternative source of production.”

A fluctuating economy

Alongside the desire to onshore production, there is also the fact that China might not want to produce goods for other countries anymore; it has a growing domestic market of its own. More than 34% of those surveyed in AlixPartners’ research predict that companies in China will redirect capacity towards local consumption rather than export. As Fellowes’ Lewis says, “we might be manufacturing in China in the future for the growing Chinese market”

This growing economy is, however, experiencing its own share of economic worries. Its growth is predicted to hit a 13-year low this year, affected, among other factors, by troubles in the EU – its biggest trade partner. Foreign confidence in China has been shaken in recent months, due in part to a reg
latory environment that some see as unsuitable for business. According to a survey by the EU Chamber of Commerce in China, about half of respondents say regulatory barriers have limited their business opportunities and hurt profits, while one in five says that might prompt them to shift investment elsewhere. 

It seems that these factors are yet another ‘put off’ for a move to China. According to Ministry of Commerce data, foreign direct investment in China from the EU slumped 27.9% in the first four months of the year compared to a year earlier. 

What all this means long term is hard to tell, given the significant effect that the shaky eurozone has on China’s prosperity. And the tide has been moving towards Chinese production for so many years now that despite worries about rising costs and the slump in growth, there may well be those moving that way for several years to come. However, though it may not be quite fair to say that the tide has actually turned, it does seem to be on the move.