I remember when the initial trends towards offshoring started. Manufacturers were exploring and pursuing it behind the scenes because, as you might imagine, it was terribly unpopular. The thought of moving american jobs overseas didn’t do good things for the brand and reputation for those companies. But soon enough, it became an open secret. And people accepted the inevitable: production and then engineering jobs went overseas.
The Tides are Changing
But in the past couple of years, we’re starting to see what you would expect. With so much work going offshore, the costs of shipping and doing business over there have started to rise. So much so that some manufacturers are doing more than just reconsidering moving some of those jobs back. An article over at Fortune titled Made (again) in the USA: The return of American manufacturing talks about the changes.
But in the after glow of the Great Recession, something surprising is happening: U.S. manufacturing appears to be on the cusp of an awakening – if not a full rebirth. Companies like Illinois-based Caterpillar (CAT), the world’s largest maker of excavators and bulldozers, is shifting some of its excavator production from abroad to Texas. U.S. furniture maker Sauder is moving production back home from low-wage countries. According to the report by Accenture, some 61% of manufacturing executives surveyed by the consultancy said they were considering more closely matching supply location with demand location by re-shoring manufacturing and supply.
Why? The article goes on to outline some of the motivations to move jobs back.
- Overseas workers are getting more expensive. China, known as the world’s factory, is seeing wages soar ahead of productivity growth. In 2000, hourly Chinese manufacturing wages were just 52 cents compared to $16.61 in the U.S., according to a recent report by Boston Consulting Group. By 2015, the wage difference should be $4.41 vs. $26.06 – still powerfully in China’s favor, but no longer a no-brain decision to hire there. And the growth rate should continue to build in China while BCG expects the US to grow at a much slower rate. As the cost savings of off-shoring narrows, BCG says it expects the return of some U.S. manufacturing.
- Shipping costs keep increasing. On top of wage increases, the costs of jetting to far flung locations and more importantly, moving goods from the factory to the store keeps heading upward. In the last four years, shipping costs have risen 71% because of higher oil prices, as well as cutbacks in ships and containers, according to IHS Global Insight.
- Global supply chains have shown weak links. Perhaps little highlights the issue more recently than the March earthquake and tsunami in Japan. Aside from the human tragedy, the disaster disrupted global supply chains, leaving many companies stranded without critical components. Boeing (BA), Caterpillar, and General Motors (GM), were among those concerned that the disaster would disrupt delivery of components and parts from Japan and therefore stall production.
Impact on Engineering
All of the reasons above are good reasons to move manufacturing operations back to the US, but what about engineering and development? The point that is most obviously relevant to engineering is wages. All in all, that was one of the biggest reasons to move engineering and development offshore, perhaps followed closely by talent availability. I expect the salaries for engineers in many of these offshored locations are also rising, but there is also some other issues to take into account. Some of these locales are seeing dramatic competition for the services for engineers. In some cases, hiring organizations are surprised to see an engineer as a no-show for their first day of work because someone else outbid in terms of salary. There’s also volatility in terms of engineering retention in that as salaries increase in an industry, they can make a move after one or two years and make substantially more money. So why not make a move to a new company? The problem lies with the organization. Such turnover means that few engineers attain enough tenure to be trusted with important design and development decisions. As we know, it can be years before new engineers are trusted to make important product decisions.
Conclusions and Questions
There is building momentum to bring manufacturing operations back from offshore locations for a number of reasons. For engineering, the one related issue that might trigger a parallel move is dramatically increasing salaries, which have not only closed the cost advantage of low-cost-country-sourcing but has also resulted in some volatility in tenured engineering retention.
What does it all mean? I can’t honestly say at this point I believe we’ll see a wave of offshored engineering jobs come back. But I do think there are issues. Whether they become painful enough to trigger such a change or not, we’ll have to see.
Time to weigh in. What are your thoughts? What other negatives are there to offshoring engineering? Sound off and let us know what you think.
Take care. Talk soon.