Reshoring

by Dave Schuler on March 28, 2012

Mark Perry points to several articles about “reshoring”, manufacturing jobs returning to the United States from China. One local story caught my eye:

In a corner of a manufacturing plant in St. Charles, a dozen workers steadily assembled electric motors that until December were produced in China.

The Bison Gear & Engineering Corp. workers inserted copper wires, tested the assembly and then readied them for the next step, the addition of a gearbox. The end products, gear motors, are used in everything from ice machines to solar panels. At one time it made sense for Bison to import motors from China, but no longer.

The reasons given in the article for the reversal are increasing wages in China and improving productivity in the United States but I suspect there are other reasons at work as well. Based on my own experience one of the motivations for Western companies locating production facilities in China is for access to the Chinese market. I suspect that quite some number of companies have found that aspect of their experience disappointing and their ability to repatriate earnings even more disappointing.

{ 6 comments… read them below or add one }

Brett March 28, 2012 at 11:22 am

@Dave Schuler

I suspect that quite some number of companies have found that aspect of their experience disappointing and their ability to repatriate earnings even more disappointing.

That’s part of the reason why Apple is sitting on a giant pile of cash.

Another reason given in an Atlantic article was that the Chinese manufacturing wasn’t too good for small runs with many different versions of a single product. They’re better for doing gigantic runs of a single product.

It’s also worth noting that the difference between labor-intensive chinese manufacturing and machine-intensive US manufacturing may be starting to disappear. Foxconn is making a push to heavily automate their factories, which may have some unpleasant effects on the “Foxconn City” population of workers.

Dave Schuler March 28, 2012 at 11:38 am

That’s one the time bombs that China has been sitting on: zero cost of labor beats low cost of labor. As Chinese labor costs rise (or Chinese mercantilist impulses become more transparent), companies look for other alternatives including capital investment.

That’s also one of the reasons I expect China to start making bigger moves into high margin activities like autos or aerospace.

Drew March 29, 2012 at 12:13 am

I can only speak from our own experience. Chinese market access has never been a consideration. Admittedly, we own small companies.

But “reshoring” is real. It’s based upon rising China labor costs, shoddy quality, transportation, flexibility and loss of intellectual property. As I noted in an earlier thread, toys and other high volume, low tech but high labor content products are just gone forever. But the US can do just fine, especially if we can get the current yokel in the WH out of there.

Dave Schuler March 29, 2012 at 7:20 am

If you google “china market billion people” you get 223 million results. Scanning down the first dozen or so they’re all about the huge potential Chinese market.

In 1979 I was called into a meeting of the top management of the Fortune 500 company I was working for at the time. They were planning on opening operations in China and wanted me to head up the technical operations side there. I was the only one in the room who spoke any Chinese or really knew anything about China.

I tried to explain to them the realities of doing business in China: the non-convertibility of the currency, that they’d never be able to move any money out of the country, the likelihood of technology transfer, the influence of the politburo, the very low level of education making it hard to find local managers, that what we think of us “corruption” they think of as ordinary business practice. Their response: China is a market of more than a billion people. Thousands of big companies must have thought exactly the same way.

sam March 29, 2012 at 9:02 am

“China is a market of more than a billion people. ”

I heard Mark Shields once describe the mindset this way: The guys who make Q-tips have visions of 2 billion ears.

Drew March 29, 2012 at 10:45 pm

I think you are correct, it’s a large corporate phenomenon. We’ve only put assets in China twice. Each time it was to make product, not sell product. One thing you point out is for sure. It’s a wild environment. And unless you want to get robbed blind you need to have a local as an equity partner.

Leave a Comment

Previous post:

Next post: