The U.S. manufacturing industry is showing signs of a comeback, after hitting its peak in the late 1970s. According to a 2015 Boston Consulting Group report, there has been a 250 percent increase since 2012 in the number of executives at large U.S.-based manufacturing companies who said their companies are actively reshoring production. The report concludes that reshoring has become a reality for many U.S. businesses.
Lower labor costs and tax advantages drove manufacturing for U.S. corporations overseas. While these factors still influence manufacturing decisions, proprietary technology is now even more critical to their long-term success. As domestic companies flirt with reshoring, the tipping point may be an advantage the U.S. had all along: robust intellectual property protections.
Many companies now view manufacturing processes and technology as their crucial differentiators and are aggressively protecting them. In industries where competition is based primarily on cost, these factors are critically important to maintaining a competitive edge.
For example, look at 3D printing, which has significantly shrunk the production time for many products in the last decade. Basic factories can be built and brought online relatively quickly. However, 3D printing technology to produce a particular product is much harder to replicate.
Companies now see the proprietary technology that runs their factories as the real asset to protect. If U.S. firms export it to countries with lax property rights protections and enforcement, they are exposed to multiple risks.
Commoditized industries are especially susceptible to intellectual property theft, since competition is primarily based on price. Consider the apparel business and the market for T-shirts, for example. Any technology that allows manufacturers to develop this product at a lower price point represents a significant advantage over the competition. Exporting that technology to a country where it could easily be replicated and used to produce an identical product for a competitor is potentially devastating for the manufacturer.
U.S. companies are not the only ones eyeing the United States for its intellectual property protections. German companies, including the Berghoff Group and Schmidt Maschinenbau GmbH, recently located production facilities in Auburn, Ala., placing them in a country where technology is more secure.
Companies still have to crunch the numbers when moving manufacturing facilities back to the U.S. Converting raw materials into finished goods, about 50 percent of a manufacturer's total cost, is difficult to reduce, and cost savings have to be realized elsewhere. Yet the U.S. remains a financially competitive choice because of its advanced supply chain, transportation infrastructure, and abundance of affordable energy help close the wage gap.
Consider the U.S. supply chain, which is being revitalized by the e-commerce revolution. E-commerce sales were up 14.6 percent from 2014, according to the U.S. Commerce Department. Overall retail sales rose just 1.4 percent in 2015, with e-commerce supporting 33 percent of this growth.
The shift is forcing retailers to dramatically improve the supply chain. Companies are expected to fill online orders quickly and deliver them in ever-faster timeframes - even same day delivery. The supply chain has become cheaper and more efficient.
Companies that move their manufacturing facilities back to the U.S. can seamlessly integrate their production facilities into this supply chain, giving them a significant advantage.
Like the supply chain, transportation infrastructure has improved to support the e-commerce revolution. Moving products from ports to distribution centers has become cheaper.
This is especially true for the East Coast, which has begun stealing market share from West Coast ports. Its merits reside in the friendlier business environment, the Panama Canal, and enhanced access it provides to the majority of U.S. consumers. About 66 percent of the U.S. population lives east of the Ohio and Mississippi Rivers. Domestic manufacturers now have access to a transportation network that is arguably more efficient.
The cost, reliability, and abundance of domestic energy offer similar advantages. The U.S. has been one of the main beneficiaries of the boom in natural gas production, which has contributed to the decline in energy costs. It also helps that these prices are valued in U.S. dollars.
Supply chain improvements, transportation development, and domestic energy have proven their merits in the manufacturing equation and can help compensate for higher labor costs.
Much has been written about the reshoring trend. While it may be premature to answer that question decisively, domestic manufacturing will be a likely beneficiary if proprietary technology continues to dictate which companies succeed in the global marketplace.