Look, we are all guilty of this – we believe what we want to believe. Maybe that’s why there are different religions in the world.
In the real world, we are being bombarded with information, much of which is often conflicting. I stopped grappling over whether coffee was good for me or not a long time ago.
While we should make decisions based on which evidence is strongest, people tend to interpret “facts” that are consistent with their desires.
All too often, we believe that the weight of evidence supports the position that we already wanted to believe was true. That is precisely why I will smugly show my wife any news report that I may come across stating that coffee might actually be good for me.
Aha, take that. Slurp.
The Reshoring Brouhaha
A few years back, I wrote a blog stating that while there was certainly anecdotal evidence of reshoring taking place, I was unconvinced that I was witnessing an actual megatrend in the making.
Judging from some of the emails I got, you would have thought I had called the Pope a Satanist. One muckety muck, I kid you not, said that he had lost of all respect for me because of my stated skepticism concerning reshoring.
Now imagine that. My response to him: “So you lose respect for anyone that you may disagree with?” How adult is that? This fellow would seem well suited for Congress.
Well, to continue this saga, late last month, the consulting firm A.T. Kearney published a study concluding that “the reshoring phenomenon appears to have been more a one-off aberration than an inexorable trend.”
Yikes! Now don’t you know that caused a bit of a firestorm. Magazine articles, far from anything that could be called scholarly work, promptly came out questioning A.T. Kearney’s findings.
“They are just plain wrong about reshoring efforts in America,” wrote one consultant. “We continue to base our opinions on actual evidence and we continue to see the outlook as optimistic.”
The Things Consultants Will Say
Let me tell you something about consultants, because I am one. A goodly number of them, not all mind you, will whisper sweet nothings in your ear. They will tell you what you want to hear, if only you will let them.
They are, after all, selling their consulting services.
I’m currently finishing up a SWOT analysis for a community and I know of at least one rather major thing that the client would want us to include in our final report. But in good conscious, we have to recognize that client’s desire for this one particular finding is just not supported by the facts on the ground.
We owe it to them to be straight with them. We just do.
Not Surveying Plans and Predictions
The 2015 A.T. Kearney Reshoring Index compares the relative evolution of goods manufactured in the U.S. with those imported from 12 key Asian ‘offshore countries’ like China and Vietnam. Unlike other studies, it does not survey plans, speculations, intentions, or predictions of company executives.
Rather, A.T. Kearney relies on a set of macroeconomic analyses of publicly available data. The intent is to go beyond the hype and determine what actually happened.
Their study shows that U.S. imports from the ‘offshore countries’ grew at a faster rate than domestic manufacturing, and that companies, in response to rising labor costs in China, are increasingly switching their sourcing decisions towards other Asian countries rather than returning to the U.S.
“In our 2015 study, we agree that, on the whole, manufacturing in the U.S. is in decent shape. However, we note that this is for a significant part due to increased Foreign Direct Investment and not reshoring, an important distinction that other studies often fail to make.”
Boston Consulting Group Lead the Charge
People started getting themselves worked up into a cheerleading frenzy when the Boston Consulting Group in 2013 predicted millions of manufacturing jobs would be created as a result of reshoring. And yet here comes this latest A.T. Kearney report saying that it is just not happening.
This past week, I spoke with Morris Cohen, Professor of Manufacturing & Logistics with the Wharton School of the University of Pennsylvania. He has been studying supply chain patterns and the issue of reshoring for several years now.
His conclusion: “Their (A.T. Kearney’s) data is consistent with what we have seen,” he said.
A lot of stuff is happening, a lot of supply chains are being restructured, maybe more so than ever before, but there is little reshoring on a net basis taking place in the U.S. (Do I detect the gnashing of teeth?)
“We observed two things. One, there is a lot of restructuring going on, a lot of shifting, but it is going in multiple directions,” Dr. Cohen said.
“Companies continue to offshore. Companies in China go someplace else, and some companies are indeed reshoring. It was a puzzle and we wanted to get a better sense of what was going on.”
Initial findings were published last year and a new set of findings, largely consistent with the first, are soon to be published in a second 200-page report, Dr. Cohen said.
A Mixed Bag
What Dr. Cohen’s report will show is that companies are doing a lot of different things, and that the same company can go in both directions (offshore and reshore at the same time.)
“Some opened factories in China. Some shifted back to the U.S. Some added capacity in Mexico and on and on. Some companies didn’t do anything,” Cohen said.
Cohen’s research shows there a great flows of manufacturing from a source to a destination but that it was a mixed bag.
“We found that yes, there are companies that are shifting manufacturing to North America. We found there are a lot of companies shifting production from China to places like Vietnam. Some are shifting from Western Europe to Eastern Europe,” he said.
“We found that the companies that were adding capacity to the U.S. and there were a fair number, were not U.S. companies. They were European companies. They were Asian companies. But very few American companies are adding capacity in the U.S.”
Cohen’s findings are consistent with A.T. Kearney’s that many foreign companies are more interested in establishing a manufacturing footprint in the U.S. than their domestic counterparts are interested in repatriating their operations from Asia.
Chinese FDI is Robust
China has been the fastest-growing source of non-domestic business expansion in the U.S. in the past seven years. Chinese foreign direct investment here reached record levels in 2014, about $12 billion dollars, up from $5 billion in 2009.
Chinese manufacturers have acquired or built facilities to produce textiles, copper, steel, automobile supplies, renewable-energy equipment, and industrial machinery in dozens of states.
Of the 60,000 new U.S. manufacturing jobs that, according to the Reshoring Initiative, were created in 2014 as a result of the combination of reshoring and foreign direct investment, about 8,000 were at China-owned companies.
The President’s Spin
And in his last State of the Union address, President Obama cherry-picked when he spoke of manufacturing jobs. The president said, “That’s just part of a manufacturing surge that’s created nearly 900,000 new jobs in the past six years.”
But if you look at his entire time in office, the U.S. has lost 230,000 manufacturing jobs, dropping from 12,561,000 jobs in January 2009 to 12,331,000 in December 2015, according to the Bureau of Labor Statistics.
For the whole year of 2015, and for the first year since the 2009 recession, the U.S. Bureau of Economic Analysis expects U.S. manufacturing gross output—which includes the input values of raw materials and intermediate goods—to shrink by as much as 3.6 percent.
Of the 2.65 million new jobs created in the private sector last year, only 30,000 were in factories, according to the Labor Department. You may want to read that again.
I’m Just Saying
Our trade deficit with China in 2015 will break the all-time record set in 2014. And nobody thinks 2016 is going to be any better, with the dollar rising, China’s currency weakening, and its industrial overcapacity not abating.
What’s more, this expansion is starting to get long in the tooth – six and a half years. The average expansion since World War II lasted less than five years. While there may be no recession this year, the odds could shift in 2017.
And the impact of China in the global economy is larger than ever before. As a result, says former Treasury Secretary Lawrence Summers, the “global risk to domestic economic performance in the U.S., Europe and many emerging markets is as great as at any time I can remember.”
Going back to my original statement, we believe what we want to believe. To that end, we don’t always weigh the evidence objectively but through a biased lens. It is why I will continue to drink coffee, until or unless I get an epiphany to do otherwise.
And, weighing the evidence, I happen to believe that A.T. Kearney and Professor Cohen at the Wharton School have concluded correctly that reshoring is not the big megatrend that so many people have touted it to be.
As the good professor said: “That’s my story and I’m sticking to it.” As it should be.
I’ll see you down the road.
Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. He can be reached at firstname.lastname@example.org or at 972-767-9518.