The On-Shoring vs. Off-Shoring Top 4 Debate Issues

In a recent article about on-shoring trends we listed several reasons why OEMs should on-shore their manufacturing. To recap:

  • The wage gap between overseas factory workers and domestic ones is shrinking.
  • A “Made in the USA” label can be a competitive advantage for a product
  • Shorter supply chains are more agile and easier to keep flowing smoothly
  • On-shoring can decrease shipping and other logistics costs
  • It’s easier to ensure production quality and consistency when the factory is physically closer to an OEM
  • Advanced automation and robotics have made American factories much more efficient than many cheaper foreign factories
  • Legal protection of intellectual property (IP) is stronger and more uniform in the U.S.

With all these advantages, one would think OEMs would be relocating their manufacturing back to the U.S. in an on-shoring stampede. Unfortunately, that is not the case. What’s going on?

Just as with any trend in any industry, there is a healthy amount of debate and deliberation on the pros and cons of both on-shoring and keeping manufacturing off-shore in countries like China, where labor costs are a fraction of what they are here.

While we do think the benefits of on-shoring are compelling and decisive, we also think it’s valuable to discuss the nuances and complexities of the top issues in the on-shoring vs. off-shoring debate.

Off-Shoring: All About Cutting Costs

Undeniably, the primary reason for off-shoring production to regions like Southeast Asia in the first place was the lower labor costs in those countries. OEMs weren’t lured by more sophisticated and efficient factories, or the prospect of higher quality goods. Understandably, a lot of the debate centers around the issue of production costs.

Issue #1-Do Lower Labor Costs Still Favor Off-Shoring?

While it’s true that wages in countries that have benefited from outsourcing have been steadily rising for years, those workers are still paid drastically less than American factory workers. Thus, on paper at least, off-shoring still retains much of its allure.

Proponents of on-shoring counter that off-shoring is only one way to reduce labor costs in manufacturing. Increasing use of automation, investing in ongoing worker training and education, adoption of lean manufacturing practices, and new fabrication technologies (like 3D printing) are all proven ways to make production more efficient and less labor-intensive.

And many U.S. factories are already implementing these. As a result, there is less money to be saved by using off-shore labor simply because labor costs are now a much smaller share of a product’s overall cost.

Issue #2- Foreign Labor vs. Domestic Automation

The unstated assumption underlying off-shoring, as we pointed out in our April article, was that a factory laborer in Chicago is functionally equivalent to one in Chengdu—a naive assumption at best.

A robot in Chengdu, however, actually can perform the same job as an equivalent one in Chicago. Furthermore, that robot will perform the work for much less, won’t demand a raise, and doesn’t ask for benefits like paid leave, breaks, or health insurance. If all those benefits can be realized within the U.S. and the primary concern was labor costs for production location, why move the work to Chengdu in the first place?

Issue #3-The Collaborative Benefits of On-Shoring

Finally, one of the key insights buried in the article from The Atlantic we cited is that once previously off-shored products are brought back and placed in front of line workers, engineers, and designers, they can collaboratively produce improvements which save much more money in the long run than off-shoring ever did. That’s how GE cut 20% out of the retail price of the GeoSpring water heater by onshoring its production.

Issue #4-Does On-Shoring Really Enjoy a Home Court Advantage?

Although seeing a “Made in America” label on a product might be a deciding factor for some consumers to buy that product instead of a competing one, that phrase can be misleading, particularly when it comes to complex electrical or electro-mechanical assemblies. An actuator assembly might have the electronic components on its motor driver PCBA made in an Asian semiconductor fab, while the circuit board itself may have be assembled by a board house in California. Meanwhile, the motor may have been made by maquiladora in Mexico—but the copper for it’s magnetic coils could have come from an American copper mine. Modern supply chains can cross multiple borders multiple times.

Although final assembly and testing for a product might be performed in the U.S., those operations comprise only a slice of the “making” of an assembly or finished product. Some can argue that on-shoring can’t guarantee that “Made in America” really means much anyway, so it’s no great competitive loss for products that are made off-shore.

On the other hand, while it’s true today’s supply chains are global, the fact that domestic contract manufactures (CMs) can be much more closely and easily monitored and audited by their OEM customers still makes on-shored production preferable to off-shoring.

Also, there are crucial inspection and testing steps which occur at the point of final assembly and packaging. These activities are performed by the CM, and thus there is a clear business value in ensuring they are carried out by well-trained and fully-equipped personnel—exactly the type of workers which can be found in domestic CMs. Thus, there’s real value is stating a product is “Made in America”.

As OEMs wrestle with these issues and adapt to a rapidly changing business climate, we at RiverStar will continue to prove that on-shoring isn’t merely a fad . . .it may well be the future of contract manufacturing.

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 On-Shoring vs. Off-Shoring Top 4 Debate Issues
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On-Shoring vs. Off-Shoring Top 4 Debate Issues
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While we do think the benefits of on-shoring are compelling and decisive, we also think it’s valuable to discuss the nuances and complexities of the top issues in the on-shoring vs. off-shoring debate.
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RiverStar Inc.
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