IS RE-SHORING FOR REAL?

A late fall issue of Bloomberg Business Week featured an interesting article describing how the introduction of Apple’s iPhone 5 jumpstarted their Asian supply chain. One of the Apple subcontractors in Malaysia immediately contacted job brokers in Nepal seeking 1500 men to assemble cameras for the iPhone. These brokers in effect “sell” the jobs for as much as a year’s pay, which often has to be borrowed by the prospective worker, leaving him/her in debt before even starting to work. In this particular case, production was soon shut down due to quality problems, leaving workers stranded in Kuala Lumpur,  far from home with no job, no money, and in debt.

In fairness, Apple has attempted to act responsibly and has been a leader in trying to control this abuse among its subcontractors, but it still persists in a number of industries. Not because of this article, but coincidentally, Apple  announced a new plant in Mesa, Arizona, that will create more than 2000 jobs in the U.S. which now reside in Asia. In December, 2012, they announced a $100 million Texas plant, as well.

Kia Motors recently announced the construction of a $1 billion factory in the state of Nuevo Leon, Mexico. This plant will produce 300,000 small cars annually for the Latin and North American markets.

This seems to be a growing trend. Several firms are taking a hard look at moving product back to the U.S., or in an “intermediate move”, back to Mexico. While wages are increasing in Asia, they still are far less than those in the United States, and Mexico seems to be a good compromise. By 2020, the hourly labor rate in China will be $7.60, compared to $30.00 in this country; but Mexico will be only $5.20. There are several good reasons to locate in Mexico other than the labor rate. The economic climate is improving, as is the transportation infrastructure; and it is close to home. Operations there are considerably easier to manage than those in Asia. The elephant in the room of course is security; but the country has taken major steps in improving both prevention and enforcement.

The entire issue is a “Catch 22” for the firms outsourcing to Asia. One of the major reasons for doing so has been the low cost of labor. But the low cost of labor has resulted to a great extent from the abuse of workers. It is becoming increasingly difficult for firms in this country to stick their heads in the sand on this issue; but as responsible companies try to remedy the situation they will find themselves with higher costs. They will be forced to seek other alternatives which include reversing their previous moves. Ironically, there are as many good reasons for near-shoring as there were for offshoring in the first place. Access, control, communications, responsiveness, and transit times all improve as activity moves closer to home; but pulling back won’t be easy.

While I believe the moves back to the U.S., Mexico, and other countries will continue; in many cases the large commitments and  investments some firms have made in Asia will keep them there for the foreseeable future, even at higher costs.

Written By: Clifford F. Lynch