New trends are impacting whether manufacturers offshore, backshore or nearshore—terms used to describe corporate decisions to produce in low-cost countries, bring production back to the United States or establish facilities near fast-growing global markets. Plus, other factors are playing a role. For manufacturers, as well as economic development and other organizations seeking to attract this investment, it’s important to understand today’s new economic realities and their implications.

Determinants of global manufacturing capital flows have traditionally included many factors. Although labor costs always have been important, proximity to target markets, workers’ skills and productivity levels, taxes, transportation infrastructure and costs, government regulations and incentives, regional supplier capabilities, currency exchange rates, and political stability are factors weighed heavily in the decision-making process.

That’s why 61 percent in 2010 and 68 percent cumulatively of U.S. manufacturing outbound foreign direct investment (FDI) went to Canada, Europe, Japan, Australia and New Zealand—high wage countries. It’s also why the U.S., with the 14th highest hourly manufacturing compensation costs, remains the top destination of the world’s FDI.

But new trends and factors are impacting manufacturers’ investment decisions, especially:

  • New innovations and technologies that boost productivity and reduce the labor component,
  • Rising labor costs in emerging markets,
  • Projected increases in the cost of fuel and long-distance supply chain functions,
  • Shifting demographics based on the desire to locate near fast-growing markets, and
  • The emerging skills shortage.

Interestingly, many of these trends and factors impact one another and add a degree of complexity. For example, over the next few years, many manufacturers plan to more closely match supply functions with demand location by nearshoring or moving manufacturing and distribution facilities closer to faster-growing markets. This action is designed to better serve consumers while reducing transportation costs, which are likely to rise significantly in the years ahead.

To make this a success, manufacturers will need to grasp changing demographic data, which can identify where tomorrow’s fastest-growing markets will be, how much cash consumers likely will spend, and based on other factors, what they are likely to buy.

According to Accenture, a global management consulting firm, “Although offshoring will continue to play a role in the supply location strategy of companies, it will be largely done in the context of chasing the demand location. This new trend of moving more supply closer to demand location appears to be a new shift for many manufacturers.”

From one perspective, this trend is nearly opposite of backshoring, which involves American companies relocating previously offshored production back to the United States due to rising costs abroad. This is projected to boost manufacturing activity in the United States. In certain industries, new innovations and technologies have successfully automated much of the manufacturing process for what was previously labor-intensive work. In turn, the labor component, as a percentage of a product’s total costs, has been considerably reduced. Consequently, for many companies, this has limited incentives to move facilities to low-cost countries and increased incentives to backshore to the United States. But for certain industries, like textile and apparel, where functions are too cumbersome to automate, production likely will continue to be completed in low-cost countries regardless of where the target markets are located.

China, which seems to dominate manufacturing news, also is impacted by these trends. Thus, as the labor component continues to shrink, and Chinese labor rates, fuel costs and expenses related to long distance supply chain logistics continue to rise, it makes sense for some U.S. producers to reconsider where to establish production facilities. And depending on the types of products made, and many other variables, including where target consumers live, the decision to backshore from China, for example, or nearshore could be two choices one company makes for different product lines.

In addition, should the production of a skills-intensive product be hampered due to a shortage of local talent, which will become a significant problem in the years ahead, a high-tech manufacturer may have to move to where the right mix of worker skills exists.

An additional factor to consider is the ability of U.S. government policy to position the United States as an export platform. By doing so, the world’s largest exporter of goods and services will become a more attractive investment destination for foreign-based manufacturers who also wish to tap into American financial and intellectual resources that can boost the desirability of their products.

But to attract investment flows today, economic development organizations responsible for states, counties and cities, and others, need to produce much more than attractive value propositions. In fact, they must create very persuasive and compelling communications programs to convey the message. If not, intended recipients may not grasp the significance of the value proposition—which likely will be buried under hundreds of others seeking the same investment. And that’s not all. Organizations also must demonstrate tremendous credibility and reliability, and build real relationships with prospects based on trust. This is especially true with Chinese prospects, who are increasingly investing in American brick and mortar.

According to the Rhodium Group which monitors such investment, in 2008, 2009, 2010 and 2011, Chinese firms spent $1.1 billion, $2.3 billion, $5.2 billion and $4.5 billion in 110 greenfield projects and 107 acquisitions in many American states. This is just the beginning.

This article appeared in Impact Analysis, May-June 2012.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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