“Insourcing” Brings Manufacturing Back to U.S.

By David L. Brown

I wrote a few weeks back that due to several factors the allure of offshoring manufacturing to Asia has faded, and that it will continue to do so. One factor is the higher energy costs that make shipping goods halfway around the world a major expense. Another is that workers in China and other Asian nations are earning higher wages and expect to see their standards of living to rise even further.

But, too bad for them, there are limits that constrain the extent to which an economic trend can continue. Now, according to an article in The Financial Times, on the FT.com website, an attractive choice for manufacturing today is … wait for it! … the United States.

Says the FT article:

The latest cheap manufacturing site for European companies is not in Asia or eastern Europe but the United States, say top executives from some of the continent’s biggest companies.

“It may sound like a joke but it can be cheaper than you imagine to manufacture there,” the chairman of one of Germany’s largest automobile groups told the Financial Times.

The reason is less the level of the dollar, which remains relatively low in spite of the euro’s recent plunge, but rather the huge level of incentives some US states are offering companies to set up factories in their region.

It is true that incentives are a major factor in the decision of European companies such as Volkswagen, which is building a $1 billion plant in Tennessee, and Thyssen-Krupp, which is building a new steel mill in Alabama. But that is not all the story. Other factors include the low dollar, which makes U.S. exports competitive, rising transport costs, and the availability of skilled labor.

A month or two ago I read that the manufacturers of the new Tesla all-electric sports car in California had changed their original plans to have the battery packs for the cars manufactured in the Philippines, shipped to England for partial assembly, and the cars then shipped to California for final assembly. Now, the entire manufacturing process takes place in California with American workers, and the reason was that it was cheaper than shipping all the parts all over the world. Remember that this is a car that sells for $100,000, so there would have been some margin to play with, but the company chose to do it all in the U.S.A.

This is a strong sign that even though the world economy may be approaching difficult times, it may not be America that will suffer the most. As I wrote recently, should we be approaching a new depression it may be the Third World and Emerging Economies that take the biggest hit. That is the opposite of the Great Depression of the 1930s, when it was the advanced economies that suffered while poor nations hardly noticed the difference.

The rulers of places such as China and India should be afraid, very afraid. Their economies are fragile and dependent upon exported goods and services while requiring imports of natural resources. Add to that their enormous populations, made up of hundreds of millions of desperately poor people and growing middle classes with a strong desire to improve their standards of living. In all, those two countries alone are home to well over two billion human beings, and it would not take much to throw their economies off the tracks.

America has its problems, no doubt about it. The subprime mortgage scandal is blowing up, as clearly signaled by the nationalization of Fannie Mae and Freddie Mac today. But we are still by far the richest and most powerful economy in the world, and nowhere near as vulnerable as those emerging economies. The trend toward new and expanding manufacturing here at home is further evidence that we may be in a better position than many others. For the last few years we have seen American jobs disappear through “outsourcing.” Welcome the new trend of “insourcing,” and celebrate the fact that new factories and industries tend to be up-to-date and state-of-the-art, while at least some of the manufacturing base that has been sent overseas was outdated and needed to be replaced anyway.

Now if we can just get serious about becoming energy independent, we can once again stand tall in the world.

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