Why reshore? Why now?

Background

There has never been a better time for manufacturers operating abroad to return home, and this is especially true since the rapid onset of the COVID-19 pandemic, which has closed borders and interrupted global supply chains.

 

The process of reshoring, otherwise referred to as onshoring or backshoring, is the act of repatriating all or a division of an operation that was previously moved overseas to a low operating cost (LOC) country (i.e., Asia, Eastern Europe and South America).

 

Since the late-1970s, manufacturers have been attracted to the allure of low wages and less stringent environmental and employment standards in these LOC countries. This increasingly globalized market was made possible because of low fuel costs and proved to be highly profitable for manufacturers with labor-intensive operations.

 

The trend to offshore continued for decades until 2010, when it reached its peak. Changing socio-economic conditions at home and abroad necessitated a reevaluation of the competitive advantages of operating offshore versus domestically.

 

The competitive advantages of LOC countries were diminishing while domestic manufacturers were less susceptible to logistical challenges caused by last minute change orders, or shipping delays, miscommunication issues, inconsistent quality, threats to intellectual property, currency fluctuations, tariffs, and trade disputes.

 

The biggest competitive advantage of operating in LOC countries was labor, and just as it occurred in North America, over time, LOC countries too, experienced an improvement in their quality of life and standard of living. As a result, wages were on the rise.

 

Wages in China rose by 80 percent between 2008 and 2011. While wages rose overseas, the previously abandoned labor force in North America was becoming increasingly flexible, valuable and rates of productivity were on the rise, as were standards of training, quality, and safety.

 

Likewise, as advanced technology and robotics came down in price and rose in availability, manufacturers were able to automate the manual and repetitive tasks that were previously offshored. Ironically, automation required highly skilled talent that could design, operate, and maintain these complex production systems, making North America an ideal labor market once again.

 

The April 2020 Thomas Industrial Survey found that 64 percent of respondents were likely to reshore their manufacturing and sourcing back to North America, which showed a 10 percent increase over the previous month, likely influenced by persistent COVID-19 pandemic conditions.

 

A survey conducted by the Reshoring Institute found that more than half of the executives surveyed were planning or considering reshoring in the next five years. The majority of respondents also made it clear that where a domestic supplier was available for parts and materials, if the price and quality were competitive, they would be willing to consider moving both its operations and its supply chain home.

 

While the concept of reshoring is great, for many, doing so is not a sure thing. Many manufacturers are concerned about labor costs, the lack of an existing U.S. facility or domestic footprint, the availability of a skilled workforce, supply chain issues and high material costs, as well as more stringent standards and regulations.

 

The best way to validate the decision to reshore is to conduct a simple cost-benefit analysis using accurate data that reflects the total cost of ownership (TCO), which is explained in detail in the next section.

What is total cost of ownership (TCO)?

Reshoring only makes sense for 20 to 30 percent of operations that consider it. Many companies base their reshoring decisions on unit price, but unit price tends to produce an inaccurate snapshot of total overall costs, which is why 60 percent of companies that consider reshoring miss 20 percent or more of their total cost of ownership (TCO). It is easy to over- and under-estimate costs and savings.

 

Conducting a TCO analysis will produce a consolidated figure that provides a value for the overall ownership of an operation. TCO takes into consideration the complete life cycle of capital purchases at every stage of ownership and provides the most accurate assessment for those considering reshoring.

 

How to calculate TCO:
TCO = I + O + D + P – V

 

I = Initial Cost: The initial cost represents up to 10 percent of the total overall cost and includes costs incurred during the design and construction process, or the purchase price of the site/building.

 

O = Operational Cost: These costs are representative of the cumulative total of production, including training, utilities, testing and others relevant to a specific operation. You can also include emergency repairs and scheduled maintenance costs in this category.

 

D = Downtime: A move is a time-consuming process that requires operations to be temporarily paused. What are the tangible and intangible costs associated with a shut down? What will it cost to pack up and move? Will you reinstall existing equipment or purchase new equipment? What labor costs are involved? Will lost production be an issue for your relationships with your suppliers or your customers? Do you have existing agreements that need to be fulfilled? While only the dollar figures are calculated in the equation, the intangible costs and their impact on your operation should be considered.

 

P = Production Costs: Represent the expenses associated with the costs of doing business such as labor, raw materials, manufacturing consumables, overhead costs, rent, marketing and advertising dollars, etc. These costs differ from manufacturing costs which are sensitive to increases/decreases in production volume and will increase as production increases.

 

V = Remaining Value

 

To simplify the process, there are tools available such as the Reshoring Institute’s Total Cost of Ownership Estimator (http://www.reshorenow.org/tco-estimator/), which is available for free online and identifies 30 cost factors to accurately determine TCO.

What is my strategy?

If the plan is to reshore, it is important to establish a project charter with clearly defined goals. Manufacturing operations that are interested in reshoring should have a budget in mind, as well as an exit and arrival strategy, as some countries impose departure taxes or require government approval upon leaving.

 

Alternatively, there are various grants, rebates, and incentives available upon arrival. It is important to work with local, regional, state, and federal economic development organizations to understand what benefits await you in the jurisdiction of your choosing. This extends to wages, utilities and land costs, supply chain and talent pipeline availability, permitting, zoning, and taxation as well.

 

Other budgetary considerations are location-, site- and equipment-specific, including labor and non-production labor costs, transportation, infrastructure, energy and utilities costs and availability, facility costs, working capital, equipment, materials, and supply.

Location cost variables

When choosing a location to reshore to, companies must consider not only the availability and proximity to labor reserves, suppliers and markets, but also the costs of living, building, and operating in those respective places, as well as the availability of housing, training and education systems, utilities, infrastructure and logistical connectivity.

 

The U.S., Canada, and Mexico each offer a unique set of advantages and disadvantages from a reshoring perspective. A major advantage to reshoring to the U.S. has been the decline in energy prices and the country’s energy autonomy (a more comprehensive state by state analysis can be found here: https://wallethub.com/edu/energy-costs-by-state/4833/). So too, is the availability and quality of infrastructure to be able to inbound materials and outbound products.

In the U.S. and Canada, high wage, high skilled workers are available, though there is a skills gap that government stakeholders, industry representatives and educational institutions are working to address. There are countless national, state, and local programs dedicated to creating a talent pipeline for industry in the U.S. and Canada.

 

When it comes to wages, they can vary on a state by state basis. The best paying states with the best cost of living are Wyoming, North Dakota, West Virginia, and Alaska, while New York, California, Massachusetts, Florida, Hawaii, New Jersey and Washington represent some of the lowest paying states when cost of living is taken into consideration. In some states, wage subsidies may be available.

It is also important to consider things like rates of unemployment and labor availability. Nationally speaking, pre-COVID-19, the U.S. was sitting at 4.4 percent national unemployment, while 5.6 percent of Canadians were considered unemployed. Unemployment rates also vary by state.

 

Land costs and construction costs are also variable on a market by market basis, with an acre of land costing on average $1,558 in Wyoming, which ranks 20th in highest median home value, and New Jersey on the high end, with an acre of land valued at $196,410 and ranked 5th in terms of highest median home value. The hotter the market, the higher the construction and land costs will be.

Mexico, on the other hand, is on par with China in terms of wages, but its national unemployment rate is 2.9 percent. The labor force is the country’s dominant competitive advantage. Labor is affordable and low to medium skilled labor is available, but language barriers can pose a problem in some cases. Specialized labor can be found in certain markets, as can English speaking talent.

Land in Mexico is also an issue. Available industrial spaces are in short supply and rents can be costly. Likewise, taxation and export can pose a challenge. Shelter service providers like Tetakawi can provide support to manufacturers considering nearshoring operations to Mexico and can help streamline the regulatory aspect of doing business so you just have to worry about operating.

Tax variables

Tax environments are as varied as land costs and wages. Tax variables to consider when reshoring are tax rebates, incentives, grants, and programs available to businesses that choose to relocate. Each jurisdiction will have its own economic development tools to attract and retain investment.

 

In the U.S. last year, 44 states levied a corporate income tax, rates that range from 2.5 percent in North Carolina to 12 percent in Iowa. States like South Dakota and Wyoming have no corporate income or gross receipts tax.

 

One of the highest corporate tax rates is found in New Jersey, but those figures are offset by generous incentives and credits which actually make it a favorable investment environment, so this is why taxes must be considered on a cumulative basis, including unemployment insurance, property tax and others.

 

How to calculate total taxes:

Total Taxes = (cumulative total of all tax expenses) – (cumulative total of all rebates and incentives)

 

It is important to know that some states limit property tax to land and buildings while others include equipment and inventory in the equation. In the U.S. 39 states offer some kind of property tax abatement for new capital-intensive manufacturing, and many offer a tax exemption on manufacturing equipment, with 5 states promising no state sales tax at all.

 

Labor intensive operations should identify states with withholding tax rebates, jobs tax credits and talent development programs while capital intensive operations would be wise to identify states with investment tax credits, property tax abatements, and those that limit property tax to land and buildings.

 

Areas zoned with Foreign Trade Zone (FTZ) designations are also advantageous from a manufacturing perspective. They offer a secure economic zone, usually determined by geographic bounds, where goods can be landed, handled, produced, and re-exported in accordance with special customs regulations which insulates companies from being subject to duties.

Site-specific variables

Once a jurisdiction is selected, the focus then shifts to the land, structures and facilities that will house the operation once reshored. Is the plan to purchase land and invest in the construction of the facility, or has an existing property been identified that will satisfy the needs and meet the capacity of the operation? Considerations like these will have significant implications on TCO.

 

There are both advantages and disadvantages when it comes to site selection. Is the property a greenfield or brownfield development? One will offer a clean slate, though it will come at a cost, and the other can have existing facilities, permits and zoning that meet existing needs, though there could be host of other challenges waiting behind the existing façade.

 

The advantages of greenfield developments, which are undeveloped sites, is their design flexibility. Purpose built facilities can be designed to accommodate existing production lines and floor layouts or new equipment and processes. They offer room to grow, and facilities can be built anew, meaning lower maintenance and repair costs over the long term.

 

There are also added costs associated with greenfield developments, chiefly the construction costs required to get a site ready for development. Long approval times can delay the rate at which a facility can get up and running which means more downtime.

 

Brownfield developments, or previously developed sites, are good economic stimuli and do not require the use of unclaimed land, which is hailed by those who wish to preserve green spaces and the environment. They often come with development incentives as well.

If an existing facility meets the needs of your operation and is to code and standard, it is a shorter timeline to get equipment in and installed and will require less downtime overall, which will definitely help from a TCO perspective.

 

If an existing facility needs to be altered or repairs need to be made, these costs will also need to be considered from a timeline and budgetary perspective. The total project cost could be less, but maintenance and repair costs will be greater over the long term.

 

Alternatively, some disadvantages of brownfield sites include less flexibility when it comes to layout and design, facilities are often in need of updating or upgrades and there is an increased risk of unexpected issues cropping up. Some sites are contaminated and require rehabilitation prior to inhabitation.

 

When it comes to site- and facility-specific considerations, ask yourself: What will your equipment or floor layout look like? Where will the equipment be located? This is important as you must ensure there is proper clearance to accommodate your equipment and processes.

 

It is also imperative that you confirm if there is any interference with existing building column footings or utilities, especially if you require the installation of a pit. In the case of press-specific applications, it is especially important to ensure the press is located optimally to accommodate your processes and workflows.

If you have drawings for the equipment, a contractor can ensure the correct foundation for your application. A geotechnical report or a vibration study may be required. Does your facility have sufficient utilities to support your equipment and processes? How will utilities reach your operations (i.e. overhead, through floors, underground conduits, etc.)?

Equipment-specific variables

Whether you are bringing your existing equipment or plan on purchasing new, it will need to be installed in your facility. Costs to be considered include installation costs, maintenance, and repair. It is also wise to identify a suppliers and partners that can support the operation from an equipment and materials perspective.

 

For instance, for manufacturing operations that rely on presses, for every second that equipment is down, time and money is lost. Is there a reliable partner in the domestic market that can support the equipment employed in the manufacturing process and make your investment worthwhile?

When it comes to hydraulic presses, their custom design, manufacture, commissioning, maintenance, repair or service and their countless applications, Macrodyne is second to none. There is a deep-rooted expertise that has been derived from thirty years in the field in industries spanning the many applications supported by hydraulic presses.

 

Hydraulic presses are extremely versatile in strike length, die space, and pressure, and they produce accurate, repeatable results. An advantage of hydraulic presses are their compact footprints and the engineering flexibility this affords. It is also cheaper to rebuild, retrofit, service and maintain hydraulic versus mechanical presses and they also enjoy longer tool life.

As a result of their versatility and the ability to customize for application, hydraulic presses are used in forging, clinching, moldingblankingpunchingdeep draw, and metal forming applications, all of which Macrodyne has experience with.

 

As President Kevin Fernandes noted, “We’re very good with the base technology of what a hydraulic press is. We maximized it across 45 different industries including brick, metal, plastic, composite, wood, etc. What we’ve done recently is invested in new types of technologies that we really couldn’t have done with the base knowledge we had.”

 

Hydraulic presses are not only used in a number of industries, but also utilize diverse materials and deformation methods. While their applications and the materials used may differ, generally speaking the process is relatively the same across all applications: there is a staging, pre-processing, loading, pressing, unloading, post-processing and handling/packaging stage that must be considered when making decisions related to equipment and these things must be accounted for in TCO analyses.

 

When looking to purchase a press, the major considerations are:

  • Frame construction
  • Tonnage capacity
  • Tool sizing and cost
  • Load type: does your process require level or off-center loading? This will have implications on which press style to choose
  • Automation
  • Warranties, service, repair agreements
  • What ancillary equipment or operations are required?