Reshoring and its potential effect on the Mississippi River Delta region
By Mike Randle
Reshoring manufacturing capacity primarily from Asia to the South and Mexico has become commonplace, and it's all about money. When China joined the World Trade Organization in 2001, the average manufacturing wage in China's Pearl River Delta (PRD) was about 58 cents an hour.
Offshoring had been going on for about seven years by 2001, but China joining the WTO made offshoring legitimate to many North American manufacturers who had not relocated plants to Asia. Almost overnight, a herd mentality took over, taking manufacturing capacity to the Pearl River Delta in China and elsewhere in Asia.
As a consequence, the American South lost over 1,000,000 manufacturing jobs from 2001 to 2010, and during that period media proclaimed that "manufacturing is gone and it's never coming back." We reported something different when offshoring was at its peak from 2001 to 2006, and in short, it was "let's just ride this out and see what happens."
Why did we not join other media outlets and many economists who were telling us that manufacturing was dead in the U.S. after China joined the WTO? Well, it was because there was only one reason all of those companies were moving their plants to Asia -- wages were 58 cents an hour. There were no other factors to offshore; just cheap labor. We knew that could not be sustained.
Companies were not moving capacity to Asia because labor there is known for its fine craftsmanship. They were not relocating their plants to China because of its central location and they were certainly not closing facilities in the South and moving to China because of the Chinese government's reputation as being less corrupt than here in the U.S. They moved for one reason: 58 cents an hour and the fact that China had the infrastructure to get those goods made by cheap labor out for U.S. consumption.
But economic factors are ever changing. In 2001 oil was $30 a barrel. It's more than triple that now. Oops! It now costs three times more to ship something around the world. Oh, and that 58 cents an hour? Those wages have grown ten-fold today to a level in the Pearl River Delta that is higher than the average wage in Central and Northern Mexico.
Why go to China to offshore when you can go to Mexico, a place that is much closer to the U.S. consumer, obviously reducing supply chain costs? No, manufacturing is not dead in the South and Mexico. If anything, offshoring to China is dead. By the way, in 2001, the average manufacturing wage in Mexico was five times that of the Delta region of China.
In other words, all of the reasons to offshore manufacturing capacity are now gone. Economies of scale have essentially forced manufacturers to make it where they sell it. That has had a tremendously positive impact on the South's economy in the last five years. No. 1, few if any manufacturers are offshoring and at the same time -- in a herd mentality -- they are all coming back to North America, where high quality craftsmanship, much lower shipping costs, reliable and inexpensive power and less corrupt governments make for a better bottom line.
A new study on reshoring done by the Boston Consulting Group came out last summer. The study showed that reshoring is on the upswing, as predicted by the global management consulting firm in 2011 and 2012. According to the latest report, more than half of decision making executives employed by manufacturers with $1 billion or more in revenues are planning to return some production to the U.S. from China or they are considering it. That's up from the survey made in February 2012 when 37 percent indicated they would reshore production to the U.S. Also, of those surveyed, 21 percent were already in the process of reshoring production, compared to just 10 percent in 2012.
So, reshoring is increasing each year and we believe it will peak in 2016 and 2017. These plants have to go somewhere and it was costs that motivated executives to offshore in the first place. The Mississippi River Delta is capturing reshored plants, and that activity is expected to increase dramatically in the next few years.