Moving Facilities Back to the U.S.
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A recent issue of Bloomberg Businessweek featured an interesting article describing how the introduction of Apple’s iPhone 5 jumpstarted their Asian supply chain. As Apple was preparing to launch the new phone, one of their subcontractors in Malaysia contacted job brokers in Nepal seeking 1,500 men to assemble cameras for the iPhone in Kuala Lumpur. These brokers in effect “sell” the jobs for as much as a year’s pay, which often has to be borrowed by the prospective worker, leaving him/her in debt before even starting to work. In this particular case, workers were found and sent to Kuala Lumpur only to have production soon shut down due to quality problems, leaving workers stranded far from home with no job, no money, and in debt to the brokers.
This kind of worker abuse has been fairly common in Asia; events such as the 2013 Bangladesh tragedy where an overcrowded, unsafe, out-of-code building collapsed, killing more than 1,100 garment workers, have made firms and consumers much more aware of the working conditions of many Asian wage earners.
In fairness, Apple has attempted to act responsibly and has tried to control this abuse among its subcontractors, but it still persists in a number of industries. Coincidentally, Apple recently announced a new plant in Mesa, Arizona, that will create more than 2,000 jobs in the U.S. that now reside in Asia. In 2012, the company announced a $100 million Texas plant.
This seems to be a growing trend, and we are hearing more about “re-shoring” — bringing production back home — and “near-shoring” — bringing it closer to home. Several firms are taking a hard look at moving product back to the U.S, particularly from China. A Boston Consulting Group study released last fall showed that 21 percent of the respondents were currently or were thinking about moving production back to the U.S. from China. Wages there are increasing, the political climate is becoming more uncertain, quality is decreasing, Chinese companies are lagging in technology, and managing an international supply chain has never been easy.
Other firms are looking at near-shoring, notably in Mexico. While wages are increasing in Asia, they still are far below those in the U.S., and Mexico seems to be a good compromise. By 2020, the hourly labor rate in China will be $7.60, compared to $30 in this country; but Mexico will be only $5.20. And there are several good reasons to locate in Mexico other than the labor rate. The economic climate is improving, as is the transportation infrastructure; and it is close to home. Operations there are considerably easier to manage than those in Asia, and companies locating there are sure to have service advantages over the Asian locations. The elephant in the room is security; but the country has taken major steps in improving both prevention and enforcement.
The issue is a catch-22 for the firms that have outsourced to Asia, and one of the primary reasons for doing so has been the low cost of labor. In many cases, this low cost of labor has resulted from the abuse of workers. It is becoming increasingly difficult for firms in this country to stick their heads in the sand; but as responsible companies try to remedy the situation in their Asian facilities, they will find themselves with higher costs and at a competitive disadvantage. They will be forced to seek other alternatives.
Moving facilities back to the U.S. will provide a significant boost to the economy. But in many cases, the large investments some firms have made in Asia will make it difficult for them just to walk away and start over in another country. While I believe the trend will continue, movement will be slow. The relationship between U.S. and Chinese labor costs is not appreciably different than it was when the work was offshored, and to simply reverse those decisions could be very expensive. The big winner in all this just may be Mexico. It will be a great compromise for those firms who want to escape Asia but are not quite ready to absorb the high cost of home grown labor.
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services. He has authored several books and hundreds of articles on transportation and logistics. He can be reached at email@example.com.