Our guest on today’s podcast is Dr. Andrew R. Thomas, best selling author and Associate Professor of Marketing and International business at the University of Akron.
Thomas says today reshoring is finally happening. After decades of sending manufacturing work to China, Western companies are finally realizing this strategy is often not the answer for generating better profits.
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Why Manufacturing First Left the U.S.
Thomas challenges the claim that most Western companies sent manufacturing operations to China solely out of greed. Starting in the 1990s many U.S. manufacturers, particularly small and medium sized companies, were pushed to move operations to less expensive labor markets because of a change in the dynamics of the American business model. For 30 years, business schools and consultants preached to maximize efficiencies and focus on core competence. They prescribed the “Toyota model”—outsource what you don’t do well and focus on what you do best.
In the 1980s and 1990s big box stores like Walmart signed large contracts with American manufacturer suppliers. At first, the suppliers prospered from having such large customers, but after a few years, the Walmarts began to squeeze them on price. The suppliers did not have negotiating power because they no longer had a diverse group of smaller customers to compete for their business. They were forced to seek cheaper labor overseas just to survive. For decades, reshoring did not even appear to be an option for Western companies.
The Pandemic and Labor Markets
Because of the supply chain problems brought about by COVID-19 and the country’s increasing wages, China is no longer the answer for many Western manufacturers to produce the cheapest parts. Thomas points out that manufacturing work is currently coming back to the West, but not exclusively to the United States. Much of the work leaving Asia will land in Latin America and Eastern and Central Europe. In those regions labor is cheaper and more abundant.
While the United States and Western Europe provided a safety net to businesses and unemployed workers in 2020 and 2021, poorer countries did not have the resources to do so. Thomas says in countries such as Panama, where he lives much of the time, the only government assistance people received was a modest stipend for food and necessities, and free rent. These desperate conditions have made people in poorer countries eager to work.
American Legacy of Global Leadership
According to Thomas, since the United States was founded, Americans have always had the notion their country was special. They believed it was important to share their values and lead the world.
This identity was solidified in 1944, when 44 allied nations sent delegates to the Bretton Woods conference in New Hampshire. The conference set up a framework to regulate an international monetary system. It created the International Monetary Fund and the International Bank for Reconstruction and Development. It ultimately established a dominant economic position for the United States and the U.S. dollar.
More than just setting up an international economic framework, Thomas says Bretton Woods spawned a gentleman’s agreement between the United States and its allies based on four guaranties.
—If a country allies itself with the United States, the U.S. will provide that country with military protection.
—The U.S. will provide countries with capital to rebuild post war economies.
—The U.S. will encourage open trade.
—The U.S. will secure the world’s supply chain with its Navy.
Much of these foundations are still present today despite claims of the last few U.S. presidents that they want to meddle less in international conflicts and focus more on the domestic economy.
Self-Reliance from New Energy Security
Thomas says one factor changing U.S. international trade is the current revolution in fracking technology. A trillion and a half dollars in private capital has been invested to build an infrastructure for fracking. For the first time in recent memory the U.S. has a choice to not be carbon dependent on foreign countries, which would give it considerable power.
It will be interesting to see how much the United States’ legacy as the world’s watchdog lives on, while its ability to focus its energy inward grows.
Question: Have you seen reshoring in your business?