The debate over offshoring of manufacturing is far from over. While “Made in America” continues to gain support in the public sphere and among major retailers – for example, participation in Walmart’s Made in America program is growing – new data from Statistics Canada highlights how offshoring can be good for the industry’s productivity levels.
The report, “Industry Productivity in the Manufacturing Sector: The Role of Offshoring,” found that offshoring allows firms to focus on core activities by adopting more advanced technologies, exposing the firms to more international best practices and facilitating a better match between a firm’s inputs and outputs.
Firms engaging in offshoring were more productive, with overall labor productivity up 6.8 percent over firms that did not offshore intermediate inputs, according to the report. This result held for manufacturers that offshored production to U.S. or non-U.S. markets, and it was especially true for those offshoring to both locations simultaneously.
While the data in the report specifically focused on Canadian firms, it lends credence to the near-shoring efforts that U.S. firms are also employing, with a particular focus on moving manufacturing operations to Mexico. Because of close proximity, transportation times are reduced, while labor costs are lower than in the U.S.
While labor costs are a significant factor, easier access to a skilled labor force may also be driving this trend. In a 2015 study from Deloitte and The Manufacturing Institute, 16 percent of executives said they were considering a new geographic location (cross-border to Mexico and/or Canada) due to easier access to talent; 13 percent said they were considering new geographic locations in other parts of the world.
These factors, however, haven’t slowed reshoring efforts around the globe. According to a report from the Reshoring Initiative, new reshoring efforts and foreign direct investment resulted in the creation of 60,000 jobs in 2014 – more than offsetting the 30,000 to 50,000 jobs lost to new offshoring efforts. In 2003, the group estimates that reshoring and FDI created 12,000 jobs, compared to 150,000 jobs lost to offshoring activity.
The two most common reasons cited for reshoring in the Reshoring Initiative report were concerns over quality, rework and warranties, and government incentives to reshore. Other factors included access to a skilled workforce, long lead times, brand image and freight costs.
Much of the investment in reshored jobs is on high- or medium-high-tech manufacturing. Three-quarters of the manufacturing jobs reshored in the U.S. in 2014 fell into these two categories. Low-tech manufacturing is less desirable for reshoring efforts.
And while Mexico remains an attractive market for nearshoring efforts, it’s also the second largest source of reshored jobs, according to the Reshoring Initiative. More than 5,000 jobs were brought back to the U.S. from Mexico through Dec. 31, 2014 – significant but far less than the more than 14,000 jobs reshored from China. Automotive and appliance manufacturing jobs led the charge.