From the Archives: How to Reshore Manufacturing Successfully

Now that the Trump administration has taken charge in Washington, its stated priority of keeping and bringing back American factory jobs has taken center stage. Trump said throughout the campaign that he would rewrite the North American Free Trade Agreement (NAFTA) to make U.S. manufacturing more competitive — and less than a week into his tenure, he announced that he wants to impose a 20% tax on imports from Mexico. Trump has also taken to publicly shaming companies such as Carrier, Toyota, and General Motors with tweets condemning their plans to produce goods for the U.S. market outside of the United States.

One short-term result? Companies that are thinking about shutting down U.S. plants may think twice, at least about the timing of such an announcement. Justin Wolfers, a professor of economics and public policy at the University of Michigan, noted in an essay in The New York Times in January that even though it is a “near certainty that the vast majority of companies won’t end up in Mr. Trump’s crosshairs,” CEOs may fear a hit to their personal reputations. The result, Wolfers writes, is that “few have been willing to announce the sort of plant closings that might put them in the harsh glare of the president’s spotlight.”

Other companies may feel pressured to consider bringing assembly jobs back to the United States that they had previously sent abroad. The “reshoring” of American jobs isn’t new. It’s an option some companies pursue after experiencing the challenges of overseas supply chain and logistics costs or higher-than-expected labor expenses in emerging economies. Returning to a “Made in the U.S.A.” model might become sweeter still in 2017, if the Trump administration offers tax breaks or other incentives for manufacturers who choose domestic production for their operations.

Companies weighing this option would do well to review a 2014 MIT Sloan Management Review article, “What It Takes to Reshore Manufacturing Successfully,” by Willy C. Shih, the Robert and Jane Cizik Professor of Management Practice at Harvard Business School and a director of Flextronics International Ltd. “While the macroeconomic data on comparative labor and factor costs may be compelling, the actual process of reshoring — bringing assembly work back from abroad — is hard work,” Shih writes. “This is especially true when the resources upon which a company draws (the supplier base, the workforce, and even the company’s own internal product design capabilities) have atrophied.”

As part of the U.S. Competitiveness Project at Harvard Business School, Shih studied the shifts in global production systems that have accompanied the growth in the tradable goods sector. When his article was published in 2014, he wrote that there was already “talk of a manufacturing renaissance and predictions of a return of manufacturing jobs to the United States.” Outside the automotive sector, however, assembly work had been slow to return. “I was interested in the extent to which this was a consequence of loss of supplier infrastructure versus a more general loss of capabilities in the workforce,” he wrote. In his research, Shih visited and/or conducted interviews at more than 35 manufacturing sites worldwide in consumer hard goods, industrial equipment, transportation equipment, food and beverage, and biologics/pharmaceuticals.

His conclusion: “Reshoring” is more challenging than the economics alone would predict. Five areas stand out as particular challenges for manufacturers: stabilizing the workforce, addressing organizational skills gaps, rethinking the capital/labor ratio, localizing (and in some cases rebuilding) the supply base, and rethinking product design to leverage its new proximity to manufacturing. Of those, rebuilding a supplier ecosystem is particularly tricky, especially for an industry such as electronics, which has seen a global shift of the supply base toward China. Manufacturers weigh a lot of factors when deciding where to locate a factory globally, and access to a thriving supply chain is near the top of the list.

For more about what it takes to rebuild product-assembly capacity stateside, along with examples and recommendations, revisit this article from our archives.