In a 1940 novel of the same name, Thomas Wolfe declared, "You can't go home again," but some companies are willing to give it a try. During the past year, we've heard of a number of companies that are rethinking their geographic manufacturing or distribution strategy. In what appears to be at least a minor trend, manufacturers are considering "reshoring"—bringing production back home—as well as "nearshoring"—bringing it closer to home, particularly from China. One of the most socially correct reasons for doing so has been the prevalence of worker abuse. Mistreatment of workers has been fairly common in Asia, and events such as the 2013 Bangladesh tragedy, when an overcrowded, unsafe, out-of-code building collapsed, killing over 1,100 garment workers, have made corporations and consumers much more aware of the working conditions of many Asian wage earners.
A Boston Consulting Group study released last year showed that 36 percent of the respondents were, or were thinking about, moving production back to the U.S. from China. There are several good reasons for doing so other than the concerns about workers. Wages there are rising, the political climate is becoming more uncertain, quality is dropping, intellectual property is becoming more difficult to protect, Chinese companies are lagging in technology, transit times are long and erratic, and managing a far-flung international supply chain has never been easy, under any circumstances.
Other companies are looking at nearshoring, with Mexico becoming a very popular destination. As for what makes Mexico so appealing, it's partly the prospect of low wages. By 2020, the hourly labor rate in China will be $7.60, compared with $30 in this country; while in Mexico, it will be only $5.20. It's not just a matter of low labor costs, however; there are other compelling reasons to locate in Mexico. The economic climate is improving, as is the transportation infrastructure, and Mexico is close to home. That proximity means operations there are considerably easier to manage than their Asian counterparts, and companies locating there are sure to see service advantages over the Asian locations. The elephant in the room, of course, is security, but Mexico has taken major steps to bolster crime prevention efforts and law enforcement.
The entire issue is a "Catch 22" for many of the companies that have outsourced to Asia with the primary goal of reducing labor costs. In many cases, these low labor costs have resulted from human rights abuses. It is becoming increasingly difficult for companies in this country to stick their heads in the sand on this issue, but as responsible companies try to remedy the situation in their Asian facilities, they will find themselves paying more for labor, putting them at a competitive disadvantage. They will be forced to seek other alternatives, with reshoring and/or nearshoring the most obvious options.
Moving facilities back to the U.S. could provide a significant boost to the economy, and relocations to close-by countries like Mexico will no doubt result in supply chain efficiencies. But in many cases, the large investments companies have made in Asia will make it tough for them to just walk away and start over in another country.
While I believe the trend will continue, movement will be slow. The relationship between U.S. and Chinese labor costs is not appreciably different than it was when the work was offshored, and to simply reverse those decisions could be very expensive. I believe the big winner in all this may be Mexico. It will be a great compromise for those companies who want to escape Asia but are not quite ready to absorb the high cost of homegrown labor.
