In the early 2000s, companies flocked to China as a prime manufacturing location – a trend fueled by low labor costs, quick product turnaround and seemingly endless production capacity. At the height of this trend, many felt offshoring to China would be short-lived, with inevitable reshoring back to the United States in the years to come.
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Nearly two decades later, reshoring of manufacturing services to North America has not materialized. Many U.S.-based contract manufacturers are still competing with overseas suppliers for the attention of North American sourcing professionals.
That’s not a revelation. But the results of a recent MFG.com survey of more than 76,000 U.S.-based buyers and suppliers might be.
The report shows that there’s a significant change in global sourcing trends happening as we speak. Work is moving out of China and circulating around the world. Where that work is landing might very well surprise you.
Using two 13-question surveys, MFG.com’s questionnaires elicited responses from sourcing professionals and manufacturers on a variety of manufacturing topics. The survey response rate was approximately 1 percent for buyers and 3 percent for manufacturers. Respondents represented all major manufacturing verticals.
This discussion will focus only on data provided by sourcing professionals, particularly responses to the following six survey questions:
1. Which of the following countries or regions are currently the primary
sourcing destinations for manufacturing your product?
2. What were the most important factors threatening your sourcing or supply
chain strategies in 2015?
3. Did your company experience a significant supply chain disruption that
caused you to investigate or select new suppliers in 2015?
4. Did you return any portion of production into or closer to North America
from a low-cost country for North American consumers in 2015?
5. Did you adopt a strategy to establish production of one or more of your
products closer to their markets of consumption in 2015?
6. Which issues will have the largest impact on the economic and competitive
future of manufacturing in your region in 2016?
- As Table 1 indicates, the top sourcing destinations for 2015 were the United States, Europe, China and Canada. Mexico, South America, India and North Africa followed.
- Custom parts buyers saw the primary threats to their supply chains in 2015 as logistics and shipping costs, product quality compliance, availability of competent suppliers and protection of intellectual property. Notably, when asked whether they experienced a supply chain disruption so severe they investigated new suppliers, 33% responded “yes.”
- An overwhelming majority of buyers (75%) did not return any portion of production to North America. This finding is reaffirmed by 67% of buyers stating they did not adopt a strategy of moving production closer to consumption.
- Buyers saw operating costs and quality labor as the top two economic and competitive factors influencing the return of manufacturing to their region in 2016.
What the Comparative Data Reveals
The survey results provide insight into the rationales behind major sourcing decisions and the regions to which those decisions are driving sourcing professionals. Comparing 2015’s results to prior MFGWatch data provides a greater understanding of the directionality data.
For instance, comparing 2015 and 2012 data, we see sourcing to China fell by 14% (49% to 35%). Sourcing in the United States also declined (89% to 80%), as did Canada (26% to 20%) and India (10% to 7%). Mexico maintained its 18% market share, while sourcing in Europe increased 7% (31% to 38%), South America went up 5% (3% to 8%) and North Africa added 1% (2% to 3%). Closer inspection of the European data shows that Eastern and Central Europe increased 9% (11% to 20%), while Western Europe lost 2% (20% to 18%).
Why Not China?
In the early 2000s, low labor costs made it seem manufacturing in China would be much cheaper for sourcing professionals. Many soon realized, however, that doing business there often created problems, such as the inability to verify supplier quality, high logistics and shipping costs and the inability to secure intellectual property.
In the MFG.com marketplace, we find that buyers with complex parts involving tight tolerances prefer not to source in China, which is often based on negative sourcing experiences in the past. These sourcing professionals often find logistics challenges and shipping costs typically offset the savings manufacturing in China once afforded.
Support for these explanations can be found in the top-of-mind issues buyers identified – keeping operating costs low, having a quality labor force available and minimizing shipping and logistics costs – and the greatest perceived threats to their supply chains – logistics and shipping costs, product quality compliance, availability of competent suppliers and intellectual property.
Interestingly, even though shipping and logistics costs were considered both a supply chain threat and an important issue, in 2015 buyers overwhelmingly indicated a reluctance to move production to North America from low-cost countries or to move production closer to consumption. Here, the influence of labor costs and workforce competence seem to trump geography.
Where Is Manufacturing Going and Why?
Eastern and Central Europe, South America and North Africa are benefiting most from the shift away from China. For Eastern and Central Europe, the main attraction is cost savings. The region offers a westernized workforce, high part quality standards and better logistics options.
However, the question remains as to how much of an investment the United States will be willing to make in technology and training to improve the efficiency and education of the workforce at home to offset the gains these regions have made on North American manufacturing.
At MFG.com, buyers typically tell us that if a part is not complex, quality and/or tolerances are not a concern and production schedules are not tight, the lower-cost solutions Eastern and Central Europe, South America, North Africa and China provide are ideal. However, if there is any degree of complexity involved, these buyers will look to U.S. sources first. They have more confidence in U.S. shops, they can check on their work more easily and domestic manufacturing eases scheduling concerns.
So, the 2015 data seem to reveal a new trend. Seven or eight years ago, everyone saw overseas manufacturing as the one-size-fits-all solution. Now, there is a recognition that all manufac turing is not created equal and that all products cannot be treated the same way. Because of this, a stabilization of offshoring and reshoring is occurring.
Buyers are becoming more educated on when it makes sense to manufacture products overseas and when it does not. While they realize lower labor costs are an important consideration, so, too, is a skilled labor force and cost-effective logistics. For the time being, Eastern and Central Europe, South America and North America seem to hold the winning combination of attributes for outsourcing custom manufactured parts.
Significant reshoring to North America does not seem to be on the horizon. Still, there is a niche for U.S. shops when it comes to highly intricate, tight-tolerance parts in many, if not all, of manufacturing’s most prominent verticals.
Chris Mitchell is Chief Marketing Officer at MFG.com, where he spearheads marketing and advertising initiatives designed to help this global marketplace achieve its full potential as the resource of choice among manufacturing buyers and suppliers worldwide. To contact Chris, please email him at firstname.lastname@example.org. Interested parties can download a free PDF version of the complete MFGWatch 2016 Report & Forecast at http://communications.mfg.com/mfg-watch-2016/.