{"id":474,"date":"2013-07-30T14:05:06","date_gmt":"2013-07-30T21:05:06","guid":{"rendered":"http:\/\/savingusmanufacturing.com\/blog\/?p=474"},"modified":"2013-07-30T14:11:08","modified_gmt":"2013-07-30T21:11:08","slug":"what-are-the-obstacles-to-more-companies-reshoring","status":"publish","type":"post","link":"https:\/\/savingusmanufacturing.com\/blog\/tradepolicy\/what-are-the-obstacles-to-more-companies-reshoring\/","title":{"rendered":"What are the Obstacles to More Companies Reshoring?"},"content":{"rendered":"

While there is still a debate about how much reshoring is actually taking place, there is no doubt it is happening, especially in the seven tipping-point industries that the Boston Consulting Group predicted<\/a> would reshore: \u00a0transportation goods, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics.<\/p>\n

For example, we\u2019ve read<\/a> about General Electric reshoring appliances such as water heaters, washing machines, and refrigerators to a factory in Kentucky, and Caterpillar is opening a new factory in Texas to make excavators. And, yes, even furniture manufacturing is coming back. At the High Point Furniture Show<\/a> in April 2012, where the Made in America Pavilion housed 50 U.S. manufacturers, Ashley Furniture announced that it was building a new factory in North Carolina. Lincolnton Furniture also announced they had broken ground on a new furniture factory.<\/p>\n

Earlier this year, Apple’s CEO Tim Cook said the company would invest $100 to build a factory in Texas to assemble Macintosh computers, which would include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.<\/p>\n

The results of February 2012\u00a0survey<\/a> from the Boston Consulting Group (BCG), \u00a0showed that 37 percent of U.S. manufacturers with sales above $1?billion said they were considering shifting some production from China to the United States, and of the very biggest firms, with sales above $10 billion, 48% were considering reshoring. The factors they pointed to were not only that wages and benefits were rising in China, but the country is also enacting stricter labor laws and experiencing more frequent labor disputes and strikes.<\/p>\n

According to BCG, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010. Wages have been predicted to rise by 60% this year alone after additional strikes.<\/p>\n

So, we might ask, \u201cWhy aren\u2019t more companies reshoring? There are three main reasons:<\/p>\n

    \n
  1. Most companies don\u2019t conduct a Total Cost of Ownership Analysis when making a decision to outsource manufacturing.<\/li>\n
  2. The United States has a high overall cost of manufacturing.<\/li>\n
  3. There are still tax incentives to offshore manufacturing.<\/li>\n<\/ol>\n

    Total Cost of Ownership Analysis<\/strong><\/p>\n

    <\/strong><\/p>\n

    In spite of the fact that I have spoken to hundreds and hundreds of people about the importance of doing a Total Cost of Ownership Analysis since my book<\/a> came out in 2009, and Harry Moser, founder of the Reshoring Initiative<\/a>, has spoken to thousands and thousands of people since releasing his free Total Cost of Ownership Estimator\u2122 in 2010, we have only reached a small portion of the people making the decisions about outsourcing.<\/p>\n

    Most manufacturing companies that have sourced and are still sourcing parts and products offshore don\u2019t do a Total Cost of Ownership (TCO) analysis. They base their decisions largely on low pieces that are based on cheaper foreign-labor rates and government subsidies by the governments of foreign countries to their manufacturers as part of their country\u2019s predatory mercantilist practices.<\/p>\n

    If a company chooses not to practice TCO, it will impact their success or failure in the long run. It would be better if more companies would move forward by utilizing the freely available TCO spreadsheets, such as the one developed by Harry Moser that will allow you to quantity even the hidden costs and risk factors of doing business offshore.<\/p>\n

    After doing a thorough TCO analysis on all of outsourced parts for your products, the next step is to build an integrated team will periodically refine and refresh the analysis. You can even expand the definition of TCO to include the physical length of the entire supply chain and the lead times associated with the entire process.<\/p>\n

    American manufacturers need to embrace the New Industrial Revolution recently written about in the June 11, 2013 Wall Street Journal by columnist John Koten. He wrote, \u201cWelcome to the New Industrial Revolution – a weave of technologies and ideas that are creating a computer-driven manufacturing environment that bears little resemblance to the gritty and grimy shop floors of the past. The revolution threatens to shatter long-standing business models, upend global trade patterns and revive American industry.\u201d<\/p>\n

    Koten quotes Michael Idelchik, head of advanced technologies at GE\u2019s global research lab, who said, \u201cThe future is not going to be about stretched-out global supply chains connected to a web of distant giant factories. It\u2019s about small, nimble manufacturing operations using highly sophisticated new tools and new materials.\u201d<\/p>\n

    High Cost of Manufacturing in America<\/strong><\/p>\n

    While the difference in labor rates between the U. S. and Asia is diminishing, the U. S. has the highest corporate tax rates now after Japan reduced their corporate tax rate last year. In addition, the U. S. has high health care costs that are getting worse instead of better under the Affordable Care Act, and the U. S. has the most stringent environment regulations in the world.<\/p>\n

    In his November 2011 column in Industry Week, Stephen Gold, president and CEO of the Manufacturers Alliance\/MAPI, wrote<\/a>, \u201cWhile manufacturers face a host of challenges, the data demonstrate that domestically imposed costs ? by commission or omission of government ? further undermine our ability to compete by adding at 20% to the cost of making stuff in the country\u2026The single most significant drag on manufacturing competitiveness is the United States\u2019 high corporate tax rate ?an average federal-state statutory rate of 40% that has not changed in decades.\u201d<\/p>\n

    According to the second quarter 2013 survey<\/a> of 317 manufacturers by the National Association of Manufacturers (NAM)\/Industry Week, concerns over health care and insurance costs caused by the Affordable Care Act are mounting. Key survey findings include the following:\u00a0 82.2 percent of manufacturers identified rising health care and insurance costs as their top challenge, an increase from 74.0 percent in the previous survey and 66.9 percent identified the unfavorable business climate due to taxes and regulation as an important challenge.<\/p>\n

    Other pressures for American manufacturers are revealed by the results of a joint survey<\/a> conducted by MSC Industrial Supply Company and Industry Week Custom Research, nearly half (49.3%) of the manufacturing executives polled listed \u201craw material costs as one of the top market pressures, followed by \u201cattracting and retaining talent\u201d at 36.6%, \u201ccompetition from countries offering lower costs\u201d at 31.5%, and \u201cexpansion into new markets\u201d at 31.0%. To help them be as competitive as possible in the global marketplace, 46% have implemented lean practices, and 26.5% have plans underway to implement lean.<\/p>\n

    Tax Incentives for Offshoring<\/strong><\/p>\n

    <\/strong><\/p>\n

    According to an article<\/a> in the Houston Chronicle, the U.S. tax code provides the following deductions, offsets, tax credits and incentives to corporations to \u201coffshore\u201d their profits overseas:<\/p>\n

    Tax Havens ? \u201cThe Organization for Economic Cooperation and Development (OECD) defines a tax haven country as one that imposes no or low taxes, does not exchange information about economic activity and lacks economic transparency.\u201d Tax havens are used by a majority of the largest American corporations.<\/p>\n

    Offshore Deferral ? U.S. citizens and corporations are supposed \u00a0to pay tax on income earned abroad, but\u00a0 \u201cmultinational corporations are allowed to \u201cdefer\u201d paying income tax on profits made overseas until \u2014 or if ever \u2014 those profits are repatriated back to the United States.\u201d U.S. corporations take advantage of this offshore deferral rule by setting up subsidiaries in lower tax countries. Subsidiaries, even when they are wholly owned by a U.S. parent company, are not subject to U.S. taxation. The deferral clause has been in the tax code for more than half a century and has outlasted numerous reform efforts. A USA Today article states that in April 1961<\/a>, President Kennedy asked Congress to rewrite tax provisions that “consistently favor United States private investment abroad compared with investment in our own economy.”<\/p>\n

    Profit Shifting ? A U.S. corporation can also avoid paying taxes on its income by shifting its income to its foreign subsidiary in a practice called profit shifting. \u201cProfit shifting involves an accounting practice of transferring assets, such as intellectual property rights and patents, to subsidiaries in tax haven countries. All royalty income earned from these assets is booked by the foreign subsidiary and so is not subject to U.S. taxation.\u201d This practice is particularly prevalent in the pharmaceutical and computer industries; for example, pharmaceutical company Merck made more than $9 billion in profits in 2010 but paid no U.S. taxes.<\/p>\n

    Earnings Stripping ? Earnings stripping is a practice in which a U.S. parent corporation undergoes a corporate inversion so that its foreign subsidiary in a tax haven country becomes the parent company and the U.S. corporation becomes the subsidiary. This \u201cpaper inversion\u201d allows all of the corporation\u2019s global income to be booked by its new foreign parent. In addition, the new foreign parent can \u201cloan\u201d money to its U.S. subsidiary. Because it is a debt of the subsidiary, the money is not taxable. What\u2019s more, the interest on the \u201cloan\u201d that the subsidiary pays to the foreign parent is tax deductible in the United States for the subsidiary.<\/p>\n

    The same USA Today article<\/a> states, \u201cCorporate lobbyists say that any move to eliminate deferral would have to be packaged with a significant cut in the 35% corporate tax rate\u2026Otherwise, the largest companies, facing an effective tax increase, would have an incentive to switch their legal residence to another country.\u201d Obviously, no one would want large American corporations to move totally out of the U. S. so the only way to address this problem is to eliminate these tax loopholes while significantly reducing the corporate tax rates. We are long overdue for comprehensive tax reform for both personal and corporate taxes.<\/p>\n

    At the \u201cManufacturing in California \u2013 Making California Thrive\u201d economic summit that was held on February 14th<\/sup> in San Diego, attendees voted regulatory reform and a national manufacturing strategy as the top two critical issues to be addressed. A national manufacturing strategy would encompass such issues as corporate taxes, intellectual property protection, trade reform, and other factors adding to the high cost of manufacturing in the U. S. If you have a strategy that supports manufacturing, it will alleviate these other issues. A Manufacturing Task Force was formed after the summit, of which I became chair. We have been visiting the elected representatives in our region to provide them with our Task Force report and make them more aware of the needs of American manufacturers. Now our Task Force is evolving into the California chapter of the Coalition for a Prosperous (CPA) which had facilitated the summit. CPA has established state chapters in Ohio, Pennsylvania, and Colorado and is developing chapters in Florida, Michigan, and New York. If you would like to support our work in California, please contact me at michele@savingusmanufacturing.com<\/a> or contact CPA at sara@prosperousamerica.org<\/a> for involvement in other states.<\/p>\n","protected":false},"excerpt":{"rendered":"

    While there is still a debate about how much reshoring is actually taking place, there is no doubt it is happening, especially in the seven tipping-point industries that the Boston Consulting Group predicted would reshore: \u00a0transportation goods, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics. For […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[51,6,7,4],"tags":[60,26,82],"class_list":["post-474","post","type-post","status-publish","format-standard","hentry","category-manufacturing","category-reshoring","category-taxesregulations","category-tradepolicy","tag-manufacturing-2","tag-reshoring-2","tag-total-cost-of-ownership"],"_links":{"self":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/474","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/comments?post=474"}],"version-history":[{"count":13,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/474\/revisions"}],"predecessor-version":[{"id":482,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/474\/revisions\/482"}],"wp:attachment":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/media?parent=474"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/categories?post=474"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/tags?post=474"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}