When Reshoring, Automation is Fundamental for Success

Summary

By Bill Lydon, Editor

The term reshoring is being used to describe the act of companies bringing back desirable jobs to the United States – those jobs that have been lost to decades of offshoring. The difference between the total cost of production in China (or other countries) compared to production in the United States is becoming insignificant. When companies include the cost of shipping, customs duties, and other fees, production costs in the U.S. are now lower or equal to production costs in the Asian countries. In addition, reshoring can improve quality, protect trade secrets and simplify supply chains. It has also become popular for companies to publicize anything that looks like reshoring to improve their image.

A major factor encouraging reshoring is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% per year. The pay and benefits for the average Chinese factory worker rose by 10% per year between 2000 and 2005, and the rate increased to 19% per year between 2005 and 2010. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015.

Reshoring is an efficient way to reduce imports, increase exports and regain manufacturing jobs in the United States. It's also one of the fastest and most efficient ways to strengthen the U.S. economy.

Automation Imperative

Reshoring is desirable, but we cannot assume that the “low labor” countries are going to continue manufacturing with low-cost labor as their key success factor. The Reshoring Initiative Organization assists companies in accurately assessing their total cost of offshoring.  In addition, the organization wants to shift the collective thinking of manufacturers from “offshoring is cheaper,” to “local production reduces the total cost of ownership.” The ultimate mission of the Reshoring Initiative is to bring good, well-paying manufacturing jobs back to the United States. This is all well and good, but U.S. companies should not lose sight of the fact that automation is the key to increased productivity and quality.

Other countries are not standing still. Based on International Federation of Robotics (IFR) data, between 2005 and 2012, sales of industrial robots to China have increased by about 25% on average per year and reached 23,000 units in 2012. This supply does not include the sales of local Chinese robot manufacturers within China. The IFR estimates the total number of robots installed in China in 2012 was between 28,000 and 35,000 units, making China the largest robot market in 2012. China will continue to have a substantial economic growth rate in the coming years. Strong investments in automation will continue to increase productivity and establish more eco-friendly production processes.

The ARC Advisory Group predicts that in 2016 Asia will become the largest Programmable Logic Controller (PLC) Market Worldwide. While attending trade events, I have talked with users from around the world, and anecdotal information indicates that China is automating in many other ways. Mexico has a huge advantage of bordering the United States, and by taking advantage of automation, it can become a world-class player.

Energy

The energy revolution caused by shale gas in the United States is cited as another success factor, but this may be transient.  According to the U.S. Energy Information Administration (EIA) report, Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Shale Formations in 41Countries Outside the United States June 2013, China has the world’s third-largest shale oil reserves and the world’s largest shale gas reserves. In January 2014, Bloomberg reported that shale gas production in China surged by more than five times in 2013 to 200 million cubic meters. In comparison, the United States produced more than 100 times that amount in 2013. According to Global Risk Insights, China’s current 5-year plan aims to produce 60-100 billion cubic meters by 2020.

Automation Investments

Automation investments will level the manufacturing playing field worldwide, so it is critical that U.S. companies leverage technology to be competitive. The government could help by providing tax credit incentives for companies who invest in automation.

Is automation a reshoring show stopper? The answer is, only if you don’t take the initiative to automate.