August 2021 Volume 3

AUTOMATION

The ROI of Reshoring Many companies in the U.S. are starting to re-think the value of reshoring some of its essential manufacturing. I had a discussion with Ethan Karp, President and CEO of MAGNET (2), about how companies are making the decision to bring back manufacturing production. Ethan talked about four important criteria that need to be considered in each of the companies’ ROI (Return on Investment) calculations when making this reshoring decision. (1.) Labor Pricing: The reality is that the U.S. will never have competitive wages when compared to third world economies such as Vietnam. However, automation and new AI technologies are reducing the amount of human labor required to manufacture a product. So, my original assumption of “labor costs are a company’s largest expense” is being challenged today. If China is using 5 people for a certain manufacturing operation that can be done in the U.S. using automation with only 1 person, one can envision the beginnings of a business case to move the production back to the U.S. Feedall Automation shares the business case many times on how our equipment reduces direct labor requirements on production lines. However, automation cannot be the sole answer. Rather it allows these other factors to become relevant in the decision to move production back to the U.S. (2.) Supply Chain Simplicity: The post-COVID world is fraught with supply chain disruptions. If you are involved with manufacturing today, you understand the frustration faced with trying to get your hands on components from oversees. Long lead-times and uncertainty of available products is causing many companies to consider better options. When you manufacture your products 5,000 miles away, you must spend extra time specializing your process in each market and need much more inventory. In contrast, localized production facilitates just-in-time manufacturing, which optimizes workflow to produce a more specialized product more quickly for less capital investment. This is one of the most overlooked costs when calculating the ROI on reshoring. (3.) Intellectual Property Protection: Intellectual property (IP) is not protected globally the way it is in the U.S. Some countries seem to encourage – or at least ignore – the theft of intellectual property. There is larger concern these days about the risk of new product technologies being copied, which can lead to decisions to manufacture new products in the U.S. The Office of the United States Trade Representative (USTR) reported earlier this year that China has “some improvements to IP enforcement, but uncertainty remains about the effectiveness of certain law changes” and that “longstanding problems such as bad-faith trademarks and counterfeiting persist (3).” The USTR also faulted China for new cybersecurity laws that are being abused to force companies to share intellectual property. I know from experience that the cost to defend

intellectual property theft is significant and difficult to enforce oversees. (4.) Quality: One of the biggest offshoring disappointments has been low product quality, which increases manufacturers’ costs in many ways (customer reclamations, re-production, waste, and lost sales). By calculating how much you lose annually due to issues related to poor quality, you can estimate your potential savings in the reshoring scenario. For example, a tube manufacturer with an annual production capacity of two million units can reduce their warranty rate from 4% to 1% by moving production from China to a fully automated factory in the U.S. If each unit costs $10, then the annual savings would be $600,000. A Note on Government Intervention: While I believe in free trade as a business owner, I see the real impact of government interaction when it comes to tariffs, free trade and the strength of the dollar. When trying to make big decisions to move or set up manufacturing facilities, these elements of your ROI equation are always uncertain. For example, the U.S. corporate tax rate was 35%; higher than France at 34.1%, and twice as much as China at 16.6% and triple Taiwan at 10% 4 years ago. Today it is 21% and who knows what it will be tomorrow if Congress decides to make a change. When evaluating a business case to re-shore production back to the U.S., use these factors to help determine the cost savings vs. the investment needed to justify the move. In my experience, a Return on Investment of less than 2 years is attractive to most reasonable business leaders. However, don’t forget to also factor in the ability to grow sales as a result of having production closer to your customers. This is the icing on the cake. Is Reshoring Happening or is it Just Talk? The jury is still out on how much reshoring will taking place. There are some indications that we are seeing some companies make moves to come back to the U.S. Harry Moser, founder and president of the Reshoring Initiative, shared “Reshoring 2010 thru 2019 totaled over 700,000 jobs, about six percent of total U.S. manufacturing employment.” (4) Another good resource is the Kearney Reshoring Index which measures the degree of reshoring that is actually occurring. This Reshoring Index tracks total manufacturing goods imported from 14 traditional offshoring partner countries, including China, as a percentage of U.S. domestic gross output of manufacturing goods. After rising steadily over the last decade, imports from those 14 countries contracted 7.2 percentage in 2019 while the U.S. manufacturing output remained steady (5). The 2020 results were not as encouraging, but they also were much harder to decipher given the noise created with COVID-related supply chain issues. As far as the Forging Industry is concerned, there were a handful of notable moves by companies choosing to bring production back to the U.S. Trenton Forging Co, TrentonMI, is a leader in the Forging industry and was founded in 1967. They won the 2020 National Metalworking Reshoring Award in recognition of their success in

FIA MAGAZINE | AUGUST 2021 37