A report released in 2013 by the MIT Taskforce on Innovation and Production noted that some of the fastest growing companies of the past 30 years, including companies such as Dell, Cisco, Apple and Qualcomm, have almost no domestic manufacturing capability. Why? The task force places the blame squarely on 1980s financial markets that placed higher valuations on “asset light” companies. The report notes that “first among the business functions that companies started moving out of their own corporate walls was manufacturing – for that produced reductions in headcount and capital costs that stock markets immediately rewarded.” Wall Street turned manufacturing into nothing more than a cost center. This financial strategy, while effective for improving the bottom line over the short term, led to the massive offshoring of manufacturing jobs, particularly after China’s entry into the WTO. By throwing manufacturing employees out of work, money was taken from the pockets of U.S. consumers that had traditionally been customers of those same companies.
How did that affect small, family-owned manufacturers? Extremely low wages in countries like China led larger companies to offshore to reduce manufacturing costs. In order to remain competitive against low wage overseas manufacturers, smaller domestic companies had to slash margins at the same time that their revenue was decreasing. Ultimately, the math no longer added up and companies either closed or were sold to companies that were already offshoring.
So this is also an issue of large companies vs. small. Multi-national companies are vocal proponents of trade agreements because many have come close to maximizing their market share in the U.S. Each additional dollar of sales revenue is tougher to get due to the level of competition here. For them, the biggest revenue upside is in emerging markets like China. So they favor trade deals that lower trade barriers into an emerging market, even if the deal is skewed in favor of the emerging market country and against domestic manufacturers.
Take a look at the roster of membership and the list of board members of the US-China Business Council (www.uschina.org), which lobbies to expand commercial relationships between the U.S. and China. You won’t see many names of smaller companies like Quill or Just-A-Stretch. Council membership is composed primarily of companies more interested in selling into China than rocking the boat with China over unfair trading practices. In a January 2013 report entitled “China and the U.S. Economy: Advancing a Winning Trade Agenda” the Council strongly defended more liberal trade policies with China. Some of their positions in this report include:
- Let’s move on from China’s currency manipulation to issues that really do matter
- We have options when China doesn’t play fair – like the WTO
- U.S. companies are a positive influence in China
- Investment from China supports jobs in America.
China currency manipulation is not an issue? Though he does nothing about it, even the U.S. Treasury Secretary continues to insist that China manipulates its currency to the detriment of U.S. manufacturers. And do you really believe that we should put faith in the WTO to pass judgment on our trade policy? Keep in mind that this is the same WTO that recently ruled the U.S. should not force meat producers to put a country of origin label on their products. Seems reasonable to me to want to know where the meat you are about to eat came from – but the WTO thinks otherwise. And as to investment from China supporting jobs in America? Sure it does, but keep in mind that some of those U.S. companies are selling at a distressed price precisely because of offshoring and the resulting inability to compete against imports. Meanwhile, the Chinese direct foreign investment money used to fund those acquisitions comes largely from their exporting of products – made with cheap labor in sub-standard working conditions – to the U.S.
Some larger companies that were quick to offshore have also neglected to revisit that decision now that the costs of overseas manufacturing are rising. Instead of merely comparing the price of a part or product made domestically vs. overseas, they should take a closer look at what is called the total cost of ownership. The total cost of ownership includes variables above and beyond the price of the product itself. Those variables include transportation costs, minimum order sizes, supply chain risk (port disruptions, political instability, etc.) and a number of other factors that are often ignored when comparing the price of an imported and domestically made item. The Reshoring Initiative has created a Total Cost of Ownership Estimator, an essential tool for any CFO calculating the relative advantages of domestic and overseas production. Companies would be wise to keep in mind that the price of an item is not necessarily the total cost.
There has also been a failure on the part of individual smaller companies to adapt to the new global environment. In my relatively brief experience in the textile business one of the biggest challenges I have encountered is the service level of the domestic vendors whose companies have been devastated by the migration of apparel manufacturing to China. Many are now surviving, for the most part, on business that is either highly regulated (e.g., seat belt strapping for the automotive industry) or the result U.S. government set-aside programs. Several of the domestic houses with which I’ve dealt seem not to have learned the lessons of the webbing migration to China.
I have often needed samples or short production runs to test new products. Procuring from a U.S. vendor a sample of a new design to show a customer is usually an agonizingly slow process. China manufacturers generally respond much more quickly to sample requests than U.S. companies. It seems that the reliance on longer run set-aside business has actually enabled some U.S. based manufacturers to continue their bad habits from days long past.
Being relatively new to the textile business, it has amazed me that so many of few remaining survivors of the domestic business have missed the lessons of the last 50 years. For the most part, they seem to be keeping their eyes on the brass ring of large orders from regulated industries, propping up their obsolete business model and turning their backs on small projects with big potential because they view them as too much trouble to pursue. Meanwhile, the loss of one important customer could put them out of business.
So there is plenty of blame to go around for offshoring. Misguided government policies and consumer inattention to country of origin were also important factors that we will address at another time. But when it comes to the massive wave of offshoring that began in the 1980s, Wall Street led the way.