3 Reasons Why Onshoring Trend May Be Short Lived
by King White, on Nov 19, 2015 1:46:45 PM
The U.S. has benefited from an influx of employee-intensive operations such as manufacturing plants and call centers as companies have shifted operations onshore over the last few years. Many people have coined the trend as the “Industrial Renaissance.” However, there appears to be some risk of headwinds changing course as several global economic conditions are changing.
“The movement of jobs back and forth from onshore to offshore has become pretty standard in the site selection business. The shift in corporate location strategies comes in cycles as the financial performance of companies and global economic trends change,” says King White, CEO of Site Selection Group.
Site Selection Group has identified three reasons why onshoring may slow down in the coming years and how companies can leverage site selection strategies to find the optimal location for their manufacturing and call center operations.
Reason #1: A strong US dollar pressures corporate profits — influencing site selection decisions
A stronger dollar cuts sales and profits at big U.S. companies, resulting in renewed interest in cost-cutting initiatives. The currency effects are hitting a wide range of industries, including consumer products, technology and pharmaceutical. Many of these companies rapidly expanded internationally and are now seeing sales shrinking in value or not keeping up with dollar-based costs. As cost-savings initiatives get implemented, it will typically create movement of companies’ operations, including distribution centers, manufacturing plants and call center operations, as they seek to maximize the efficiency of their enterprise.
The following table provides a comparison of currency values in several key countries to help identify countries with the greatest currency valuation shifts.
5-Year Currency Valuation Comparison
USD / CAD
USD / MXN
USD / PHP
USD / CNY
USD / INR
Reason #2: Wage inflation increases the operating costs of US operations
Labor costs have historically been one of the main factors that causes companies to relocate offshore. As previously investigated by Site Selection Group in the blog titled “The Impact of Rapidly Increasing Labor Rates on Site Selection Decisions,” there are many high-demand occupations that are incurring an annual increase in wages of more than 5 percent. When you can pay $1 per hour instead of $15 per hour to make a widget, it is very difficult to justify onshore locations. With the advancement of technology in manufacturing and telecommunications as well as the demand for “American Made” goods and services, many companies and consumers have endorsed a quality over cost strategy, which has led to the onshoring trend. The issue that has yet to be challenged is if those same corporations and consumers will stand by their patriotic view as wages in the U.S. continue to inflate and the availability of workers diminishes.
Reason #3: Looming recession may be the tipping point
The unofficial end of the Great Recession was in 2011. Since this time, the U.S. has been in a prolonged economic recovery — one of the longest in history. The odds of entering into another recession in the next 12 to 24 months is highly likely as a result. Many economists anticipate the next recession will be mild; however, it may be enough to make many companies rethink their onshoring initiatives and once again go back to the offshore location strategy.
Corporations have the obligation to deliver maximum value to their shareholders. The question becomes this: Does maximum value mean lower cost or higher quality? There is a price to pay for the later. As a result, companies seeking to optimize their location decisions for their call centers, distribution centers, manufacturing plants and other employee-intensive operations will be forced to make some hard decisions in the next few years in order to stay globally competitive.