Onshoring - Is China Losing its Competitiveness as a Low-Cost Location for Manufacturing

 More than half of U.S.-based manufacturing executives at companies with sales greater than $1 billion are planning to bring back production to the U.S. from China or are actively considering it, according to a new survey by The Boston Consulting Group.

 The share of executives who are planning to "onshore" or “reshore” or are considering it rose to 54 percent, compared with 37 percent of executives who responded to a similar BCG survey in February 2012.

According to the survey, the top three factors cited as driving future decisions on production locations were labour costs (cited by 43 percent of respondents), proximity to customers (35 percent), and product quality (34 percent). More than 80 percent of respondents cited at least one of these reasons as a key factor. Other leading factors include access to skilled labor, transportation costs, supply-chain lead time, and ease of doing business.

The trend of onshoring – also known as reshoring – has been especially pronounced in the US in the last few years. One important contributory factor has been where the shale gas revolution which has driven down energy prices (energy is usually a key cost in manufacturing). Rising labour costs in Asia, particularly in China, have made US manufacturing relatively more cost effective.

In the last two years major US industrial groups such as Dow Chemicals, Caterpillar, GE, and Ford have started moving some manufacturing back to the U.S. from China.

Back in 2012, BCG produced some analysis which suggested that the US had closed the gap with China in terms of manufacturing costs and had a significant cost advantage over Europe and other developed economies.

In the chart above (source; BCG, 2012) it is projected that the US will have average manufacturing costs only slightly higher than China. If the US cost index is 100, China's costs are projected by 2015 to be just over 5% lower. By contrast, manufacturing costs in the UK are projected to be 8% higher than the US. If the projections prove accurate, then by 2015 developed economies such as Germany, France, Italy and Japan will still be at a significant cost disadvantage to China when it comes to manufacturing.