Is Re-Shoring Our Manufacturing Sector for Real?

“…The danger of living in a virtual world, where the flimsy edifice of a financial services sector is built on hot air, has once again been painfully evident in the recent meltdown which the world is still reeling from. The service sector has no raison d’être without real wealth created by cultivation and by manufacturing. Somebody somewhere has to grow food for the people engaged in the service sector. The same people also drive cars that can’t be born out of a financial analysis. There is a multitude of goods essential to the lifestyle of the service sector that needs to be produced. It is not wise to assume that an economy of any significant size, dependent purely on imports for all goods and produce may be sustainable over an extended term.”

Anonymous, The Economist‘s online debates on ‘How important is manufacturing?’

 Recently I read a report by IDI (a US based developer) -“Not Made in China”- in which IDI talks about re-shoring, i.e., bringing work back to the US from oversees. There are numerous reasons to believe that if a nation wants to survive and enjoy a higher degree of economic security, manufacturing cannot be surrendered. Re-shoring becomes an important issue as we see the effects of the loss of manufacturing happening in the US and abroad.

Off-shoring in the past appealed to manufacturers because of a 30-50% reduction in labour costs. The situation, however, is changing. Wages in China are increasing by 15-20% a year.  They are predicted to climb from .52/hour in 2000 to $4.41/hour in 2015, the result being that “manufacturing in some areas of China will be only 10 to 15 percent cheaper than in the US. After factoring in shipping and inventory costs, the advantage is minimal”. In addition, foreign manufacturers in China often experience repeated manufacturing glitches, delivery delays, cash tied up for months waiting for inventory to arrive and the added cost of numerous trips to China.

The IDI report also says, that according to a June 2011 survey of North American manufacturers, 21% are bringing production into or closer to North America, and 38% planned to research such a move soon. Among the companies that have made a decision to build their new plants in the US are Continental, GE, Bridgestone, Nissan, NCR, Yamaha and Electrolux.

The Annual Report by the American Chamber of Commerce in Shanghai, published in February 2012, says that “American businesses are finding their prospects in China clouded by surging costs, intense competition and regulatory interference… difficulties in hiring and keeping qualified staff and persistent regulatory obstacles as the most common constraints… Corruption and fraud are a concern for many businesses… Companies also saw little improvement over recent years in protection of trademarks, patents and other intellectual property… A growing number of businesses, nearly three-quarters, also cited bureaucracy and a lack of clarity over industry regulations as increasingly difficult challenges.”  Although nearly 80 percent of companies participating in that report say their business in China is still profitable, fewer companies reported rising revenues or profit margins.

According to “Today in Manufacturing”, President Barack Obama promotes economic revival “built on American manufacturing.” In the new budget, Mr. Obama is proposing tax incentives to companies that move their overseas operations back to the US, along with tax penalties for those that don’t, and more opportunities for training and additional education. Obama’s plan would:

– Prevent U.S. companies from deducting moving expenses when they shift production overseas,

–Offer a 20 percent moving-expense tax credit for businesses returning to the U.S.

– Establish a new trade enforcement unit.

– Modify a tax credit for domestic production to make it apply more narrowly to manufacturing.

– Extend $5 billion in new tax credits for clean-energy companies.

– Reduce the nominal maximum 35 percent corporate tax, most likely taking it down to the high 20s.

Obama may also propose a minimum tax on overseas profits. In addition, he has called for a minimum 30 percent tax rate on annual incomes of more than $1 million. Business interests claim it could harm small and medium-sized manufacturers who file tax returns as individuals.

Economists suggest that Mr. Obama’s plans may make more political sense than economic sense (this is an election year, after all), but those plans might at least give some boost to the US manufacturing.

If re-shoring becomes a factor in the US economy, we in Canada are bound to feel the effect of a potential US rebound in manufacturing given the close relations between our two countries. The question remains, will we see similar processes in Canada, particularly in Ontario? On one hand, labour is cheaper in the US and the level of incentives is significantly higher. On the other hand, locally, we have an edge over the United States due to our cheaper health care (one of the reasons  Toyota is here), as well as one of the best taxation systems in the world and a more highly educated workforce. It seems that we do have a reason to be hopeful about the future, don’t we?