In-sourcing - Back to America

Last December, Apple’s CEO Tim Cook surprised many. Not through another outstanding product but rather through an announcement. Apple wants to bring some of its manufacturing back to US from apparently low cost China. And it is not only Apple who is working on this line. Companies like Ford, Honda, General Electric, Caterpillar, Dow Chemicals and Intel are also working on the same. Is there a new trend of ‘in-sourcing’ happening to the American manufacturing?

Looking Back

last decade was all about outsourcing of manufacturing operations to developing world. China received by far the largest chuck of it. The primary reason for such was low labor cost in China. American manufacturing companies reduced their cost by shifting to China and thus gain substantial competitive advantage. But in recent years things are changing which reduced this advantage and thus reversing the trend from‘Outsourcing’ to ‘in-sourcing’. 

Current Reality

Firstly, labor cost in china has been increasing drastically at 20 % over last few years and is expected to continue. In contrast, in the United States it was only 3%. Even though the labor cost in absolute term is still much lower in China, the advantage from it is unquestionably reducing. But labor cost is not the only concern especially for industries with high automation.

In 2012, United States witnessed a boom in Natural Gas. This reduced the energy cost substantially. Currently, natural gas is four time cheaper in United States than in Asia. Another factor is logistical cost of outsourcing. Oil price is three times of what it was in 2000. As a consequence, the shipping cost has increased reducing outsourcing advantage. Lead time is also a major concern especially for companies needing rapid on- demand replenishments. As Taphandles, producer of a beer-marketing product, shifting to US from China sighted that lead time of three weeks is out of place with their customers’ demand.

Beyond this there are elements which are more subtle. Control, innovation, quality and image are few of them. The companies are finding it difficult to control the distant factories. Unavailability of supply chain expertise along with cultural and language barrier is the prime reason for it. Keeping designer and assembly workers close and interacting is one way to stay innovative which is missing with distant factories. Quality and Image are concern for companies like Apple. These cost elements are difficult to quantify and possibly not thoroughly accounted for while taking the outsourcing route in the first place.

Conclusion

So does this In-sourcing trend imply that all manufacturing will shift back to United States? Definitely, it is not going to be so. In short to medium run, companies with high automation, requiring high skilled workers, requiring high precision on quality and rapid replenishment will probably shift back to United States. Others especially with high percent of total cost in labour such as T-shirts, toys, and small electronics producers will continue to be in Chinese shore. In the long run disruptive technological advancement in the field of artificial intelligence, 3D printing, and nanotechnology might set new equations to solve.

References

http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing- boom/309166/?single_page=true

http://www.nytimes.com/2011/10/13/business/smallbusiness/bringing- manufacturing-back-to-the-united-states.html?pagewanted=all&_r=0

http://www.ciras.iastate.edu/productivity/supplychain/CIRAS101m.pdf

http://news.yahoo.com/blogs/ticket/obama-plan-insourcing-help-revive-u- manufacturing-182159316.html

About the Author

Subhronil Bose is a PGDM student of 2012-14 batch. He is an avid reader and a good orator. He can be reached at subhronilb2014@email.iimcal.ac.in













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