Iconic brands such as Apple, Nike, and Wal-Mart have moved the manufacturing of most of the products they sell overseas. These juggernaut companies have been able to provide United States (U.S.) consumers with affordable products by using China as their primary manufacturing hub.
These companies are not alone. Many U.S. based manufacturing companies in a wide array of different industries have capitalized on China’s ability to manufacture at a very low cost. With the increased production shift to China, supply chains and logistics have become efficient in bringing products across the pacific. Container ship frequencies and prices have become extremely competitive too.
According to the Office of the U.S. Trade Representative “China is currently our largest goods trading partner with $559.2 billion in total (two way) goods trade during 2020. Goods exports totaled $124.5 billion; goods imports totaled $434.7 billion. The U.S. goods trade deficit with China was $310.3 billion in 2020. This is a massive trade deficit.
With the recent COVID-19 pandemic and the invasion of Ukraine by Russia, a significant downside has emerged in global trade. In addition, current geopolitical tensions between the U.S. and China have increased the danger of depending entirely on China for U.S. goods imports. These unexpected events have prompted the need for U.S. companies to bring production closer.
Reason #1: Shipment Costs Are More Expensive Than Ever
Along with low manufacturing costs, freight costs from Asia have been very attractive to U.S. importers. However, the COVID-19 pandemic, shipping costs increased substantially as U.S. demand from China rebounded.
According to the Wall Street Journal, “The average price to move a 40-foot box from China to the U.S. West Coast is likely to be between $7,000 and $8,000, a record high for annual freight pacts and higher than last year’s average of around $5,500”. Some U.S. importers to secure products entered spot contracts separate from their yearly freight contracts, some of these contracts were over $20,000 per container.
Many companies were caught off guard, had difficulty delivering goods to their clients, and had to absorb freight increase costs. Disruptive events such as COVID-19 and the war in Ukraine are likely to happen again. U.S. importers should assess their long-term risk and plan to bring some of their production closer to U.S. shores.
Reason #2: Shipment from Far Away Countries Takes Time
Most shipping is done by sea and takes a considerable amount of time. Beyond increased prices, the time it takes to ship products to the U.S. is another unattractive factor to consider.
It would be far preferable to have stock quicker and avoid overstocks. If a company chooses to produce back in the U.S. or in a neighboring country, products would reach customers faster.
Reason #3: Bringing Production Closer to the U.S. Generates Jobs
Moving production closer to the U.S. is not only an investment for the company, but also in the region. When US-based companies manufacture near home soil, they create jobs. Creating new jobs in the area could reduce illegal immigration as migrants would find jobs in their home countries. In addition, people will have more money to spend, and regional economies could prosper.
There is truth in the saying, “what comes around, goes around.” As the company invests in the American people, the people will reward the company. Customer loyalty to American brands should increase as a positive influence in the region would be appreciated.
Reason #4: Quality Control
Moving production back to the U.S. or a neighboring country has another crucial benefit. Companies manufacturing at home or closer to home will have greater control over product quality.
Quality control in factories located on the other side of the world can be costly. Companies can increase their quality control visits to suppliers in the region. Ensuring the quality standards are maintained ensures the end customer receives high-quality products.
Servintec USA and US Manufacturers
Bringing production back to the Americas benefits companies that outsource production to Asia. U.S. manufacturers should move production closer to reduce risks associated with offshoring. By nearshoring, the region should experience higher employment levels and strengthen regional bonds.