Is Sustainability Bringing 'Made in the USA' Back into Vogue?
Last week I had a drink with my father-in-law and a well connected colleague of his from China. My father-in-law runs a mid-market consumer package good company; his products are mainly manufactured in Asia. During our chat I started to wonder whether sustainability makes the economics of bringing manufacturing back from China to the U.S. more enticing.
More and more U.S. companies are reconsidering their "made abroad" decisions. CNN ran an article on June 17 that highlighted decisions by GE, Carbonite, and NCR to relocate manufacturing jobs from China, India, and Brazil to the U.S. But do the economics support these decisions?
Initially I didn't think so. Surely the labor cost gap between the U.S. and China is insurmountable. Then I came across a report BCG published last month that forecasts labor costs in the two countries will "converge by 2015." Specifically BCG cites the rising Yuan and labor cost increases of between 15 to 20 percent annually (due to skilled labor supply/demand imbalance) as proof for their assertion.
With labor costs serving as a smaller roadblock than I imagined, I started to think about many of the other costs involved in traditional "where to manufacture" formulas. China faces the same inflation in raw materials costs as the U.S.. And products manufactured in the U.S. are not subject to port fees and tariffs.
The gap in costs is less than I thought, but does still exist. Then I applied sustainability as another lens to evaluate this question. Not only does the gap become smaller, it essentially disappears. I used three factors in my sustainability lens calculation: Transportation, manufacturing audits and reputation.
Transporting products manufactured in China to be sold in the U.S. (or anywhere else) both consume energy and emit carbon. The salad shooter produced in Guangdong has a larger environmental footprint relative to the salad shooter produced in Louisville, assuming factory conditions are the same in both places. When a company factors in a cost for carbon emitted from oceanic transportation costs, moving manufacturing back to the U.S. looks more affordable.
More and more U.S. companies have integrated environmental and social expectations into their supplier codes of conduct. Suppliers are expected to self-assess their compliance with these codes. Often these self-assessments raise red flags that require companies to conduct in-person audits of their suppliers' operations.
Relying on overseas manufacturers introduces uncertainty about compliance with accepted sustainable manufacturing guidelines. Companies have come to rely on a combination of overseas auditors and trips by U.S. personnel to confirm compliance.
Worker indignities in factories China and other countries have distressingly led to a series of suicides among workers. Widespread use of social media ensures these and other related stories of apparent social injustice are viewed worldwide. Association with factories that employ indecent worker practices, low wages, cramped accommodations, or all of the above is not additive to corporate reputation and goodwill. The decision to "repatriate" manufacturing is traditionally based on economics, quality, and lead time. The economic advantages of manufacturing overseas have both been well chronicled and well exploited. As companies more closely integrate sustainability into competitive strategy, a re-evaluation of the 'made overseas' question should be top of mind. When was the last time your company evaluated this decision?
Photo CC-licensed by Alan Miles.