offshoring cost-effective article contributed article china money

April 19, 2019      
Jason Middleton

It’s no secret why many companies choose to outsource some or all of their manufacturing processes to China. The availability of cheap labor and lack of stringent regulations in the country mean U.S. companies can save significantly on fixed costs by outsourcing – at least in the short-term. In practice, however, offshore manufacturing tends to cost far more in the long run. Here are some of the main reasons why.

1) The current trade war with China

The U.S. is currently imposing approximately $250 billion in tariffs on Chinese imports. For the first time in a long time, many manufacturers are finding domestically manufactured products are now more cost-effective than their outsourced counterparts. It’s unclear how this trade war will play out, but at least in the short term, offshore manufacturing is no longer necessarily less expensive from a fixed-cost perspective.

2) Quality assurance overseas is easier said than done

Many companies have discovered the hard way that contractual quality clauses are extremely difficult to enforce from overseas. In 2013, after a faulty airbag inflator led to a number of deaths and injuries in cars equipped with Takata airbags, the company recalled 3.6 million cars. Takata was a successful Japanese-based automotive parts company, but the faulty inflators that caused the airbag malfunctions were manufactured in Mexico. Ultimately, upwards of 42 million cars with Takata airbags were eventually recalled by order of the National Highway Traffic Safety Administration — and the company went bankrupt in 2017.

3) Hidden costs add up

Not surprisingly, overseas shipping and transport (including air freight) can cost a great deal of time and money. With lag times of two to three months — to say nothing of unanticipated delays — the total landed costs can add up quickly. Many manufacturers recommend engaging legal guidance both in the U.S. and the place of manufacture. This, too, can be costly, though probably less expensive than moving forward without legal consult and needing it later. There can also be hidden costs associated with production quantity; in many cases, outsourcing is only cost-effective with high-quantity production yields.

4) Automation is changing the manufacturing landscape in the U.S.

The next frontier of cost efficiency is happening right here in the U.S. Incorporating automation into manufacturing is helping companies save costs and increase efficiency across a wide range of industries. The flip side, of course, is that many people are concerned robots will end up replacing human workers, threatening to negate one of the many benefits of reshoring: providing reliable jobs to domestic workers.

This concern is not an unreasonable one. Various studies, including a 2017 report from the McKinsey Global Institute and a study from the University of Oxford suggested anywhere from 20% to 50% of jobs are threatened by automation. The reality is more nuanced, and thankfully, much more encouraging.

As many companies are discovering, automation actually provides an opportunity for different kinds of employment (and in many cases, more employment in general). Ray Products, where I work, is an excellent example. When we introduced a fully robotic six-axis trimmer to our thermoforming workflow, we ultimately ended up increasing our workforce by 20%. This isn’t just anecdotal — a recent Brookings Institution report found that in Germany, where manufacturers are using three times more robots than their U.S. counterparts, they’re also employing more people.

While it’s impossible to predict the future, my money’s on a combination of robots and reshoring.

Jason Middleton Ray ProductsAbout the author: Jason Middleton is vice president of sales at Ray Products, an Ontario, Calif.-based plastics manufacturer.