US factories heading back home from China

More and more US bases companies are moving out their manufacturing units from China to their home. Even though rising wages in China is the main reason for the relocation of the factory units, there are something more or even bigger reasons for them to substantiate their move. The increasing expense in shipping, supply chain issues and the need for more control are the other factors that driving the US companies to relocate their production units in US.

Made in USA. Image source

In China the wages are increasing at the rate of 15-20% each year which is narrowing down the cost gap between US and China. According to a recent study, earlier in 2005 it cost less than 45% in China to manufacture electric motors for automobile windshield wipers. However, the rising wages and shipping cost has brought down the savings of Chinese made model just to 18% when compared to a US made model. It is anticipated that by 2015 the cost will only be just 9% less for Chinese made motors.

For Seesmart Inc, a small lighting company in California, wage raise was just one factor to shift their production to US from China. They found that the labor cost advantage they enjoyed from China was offset by paying more for air freight. According to them by setting up the production units back in US will not only cut their logistics cost by 30% but also will help them to reach their customers quickly.

If rising wages and shipping cost were the reasons for Seesmart to move their factory outlets from China to US, it was quality issues and increasing lead time that provoked GE and Caterpillar to relocate their production centers back to US. According to GE, “Made in China” products were causing quality issues in US market. They found that with advancement in manufacturing technology, labor cost formed only a relatively small part of the total cost which encouraged them to announce to $800 million investment plan in US until 2014. Later Caterpillar, a leading manufacturer of construction and mining equipments, announced nine new plants in US to reduce the lead time and to meet the increasing local demand. According to them, setting up the manufacturing units close to customer helps them to provide better service and increase the speed to market. Moreover they indicated that the production in home country will further help them to improve the flexibility to meet uncertain demand and reduce the delivery time while maintaining the quality.

Apart from GE, Caterpillar and Seesmart Inc many other companies who have presence in China have also announced the decision to shift or all part of their production capacity back to US. According to a recent survey by Hackett Group Inc consultancy, about 46% of manufacturing companies in Europe and North America are considering to return some production from US to China while 27% are in the process of shifting the production to US.

It is forecasted that the trend of re-shoring manufacturing capacity by US companies is to increase and will reach its peak within next few years.

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