Manufacturing: Backshoring on the rise

27/01/10

Executive summary: American manufactures are considering which manufacturing operations to be returned to the United States, writes William J. Holstein in s+b Exclusive. Higher prices on raw material, wages, transportation costs may move more American companies away from Asia and South America

Edited by Peter Horn

The offshores are going backshore: Recently, the maker of automated teller machines (ATMs) NCR has rejected a strategy of offshore manufactoring to trim factory costs, writes William J. Holstein in s+b Exclusive.

Last year, the company decided to reclaim responsibility for making one of its most sophisticated lines of ATMs from Flextronics in Brazil and instead manufacture the machines in Columbus, Ga., not far from the NCR innovation center, where its new technology is on display. The reason: The company was concerned that outsourcing distanced its designers, engineers, IT experts, and customers from the manufacturing of the equipment, creating a set of silos that potentially hindered the company’s ability to turn out new models with new features fast enough to satisfy its client banks.

“You’ll see a lot more people returning manufacturing to America,” says Peter Dorsman, NCR’s senior vice president in charge of global operations, who has been contacted by dozens of U.S. companies studying whether they should make similar moves.

Japan started the trend
NCR’s change in direction has raised the possibility that U.S. manufacturers are getting serious about “backshoring” some of the production they shifted overseas in the wholesale offshoring movement that started in earnest in the 1990s. General Electric Company Chief Executive Jeff Immelt recently attracted attention for remarks he gave to a West Point leadership conference calling for U.S. companies to make more products at home. GE announced last the summer that it would build two new plants in the U.S. — a factory to make high-density batteries and a facility  to produce hybrid electric water heaters currently made in China.

Dow Chemical Company CEO Andrew Liveris similarly has appealed for a renewed focus on manufacturing in the United States.

Backshoring is primarily an American phenomenon. U.S. manufacturers have been much more aggressive about outsourcing than their Asian or European counterparts. Japanese companies experimented with outsourcing high-end items to factories in Southeast Asia and China. They quickly changed course after growing concerned about the loss of intellectual property and the disrupting link between research and manufacturing. To-day Japanese companies generally farm out only the manufacturing of commodity products.

IBM: 90,000 employees - in
India
Many U.S. jobs are still going offshore: The Whirlpool Corporation recently announced the closing of an appliance factory in Evansville, Ind., amid plans to move less-skilled jobs to Mexico. In the financial-services and information technology sectors, there is no letup in sight in the rush toward India: IBM has more than 90,000 employees in its Indian outsourcing operations.

The logic behind backshoring: Higher transportation costs as well as rising wages and raw materials prices in China, inevitable by-products of the huge gains that the developing country’s GDP has made despite the global recession, have frightened some U.S. companies away from Asia.

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