Canadian Plastics

RESHORING: MYTH OR REALITY?

March 13, 2015   Canadian Plastics

Popular ideas can be hard to resist. Brian Burke convinced a lot of people that Phil Kessel would turn the Toronto Maple Leafs around, for example. Speaking of things turning around, another popular narrative involves reshoring. According to many, long gone are the dismal days when manufacturing jobs and output were lost due to foreign competition. We’re told that higher foreign labour costs, cheap domestic oil and gas, and automation are combining to make North America the new global manufacturing hub.

It’s a winning story, but is it true?

FACT OR FICTION?
It’s almost impossible to read a newspaper or watch the news these days without coming across a report of a renaissance in North American manufacturing. The cheerleaders cite an array of heartening examples, including a US$4 billion investment by Dow Chemical to boost its ethylene and propylene capacity on the U.S. Gulf Coast, an announcement by electronics manufacturer Flextronics of plans to create a US$32 million product innovation centre in California’s Silicon Valley, and a decision by Airbus to build a US$600 million assembly line in Alabama for its jetliners. Public figures as important as Prime Minister Harper and President Obama have both recently hailed manufacturing sectors in their respective countries that are adding jobs for the first time since the 1990s.

But does this indicate an authentic reshoring movement? Some say no. Forbes magazine has derided the notion of a manufacturing comeback in North America as “a cruel political hoax,” and the New York Times last year ran an editorial by economist Steven Rattner entitled “The Myth of Industrial Rebound.” On the other hand, Chicago-based audit, tax and advisory firm Grant Thornton began the executive summary of a November 2013 report by boldly stating that “reshoring is real — and about to dramatically reshape the [North American] economy.” And a new report by Toronto-based KPMG reveals that Canadian companies are increasingly turning away from offshoring as a cost-saving solution. “In 2014, only 14 per cent of manufacturers planned to source from China, compared with 31 per cent in 2013,” the report noted. “Likewise, plans to source from India were at three per cent this year, compared to 12 per cent last year.”

And it seems clear that significant numbers of manufacturers are buying into the reshoring idea. One study by Boston, Mass.-based L.E.K. Consulting found that 57 per cent of respondents are convinced that North America is in the midst of a manufacturing renaissance, and a whopping 68 per cent of them believe that their industry will experience accelerated growth in the coming years as a result.

So what’s a Canadian plastics processor to think? In the prevailing sentiment of just a few years ago, much of the plastics industry saw China and low-cost offshore manufacturing as inevitable. Now it seems as though the one-time inexorable march eastwards has not only slowed, but in some cases reversed course.

A third scenario is less black and white than either the cheerleaders or the naysayers would suggest: a modest improvement in Canadian and U.S. manufacturing, yes, but not a wave of reshoring. If more companies are investing in Canada or the U.S., or considering them as locations for new manufacturing facilities, this is essentially a rebalancing after many years in which manufacturing shifted overwhelmingly to lower cost nations such as China. Reshoring isn’t just a buzzword, this theory goes, it’s an economically driven correction to a supply chain that had become unbalanced. And it’s all about companies wanting production close to demand.

OFFSHORE OPPORTUNITIES
The backstory to reshoring is, of course, offshoring. Offshoring was real enough, and didn’t happen overnight. Instead, it was a 20-year trend of incorporating low-cost countries such as China, Taiwan, Malaysia, India, Vietnam and Thailand — to name a few — into the global economy, during which time a lot of cheap labour was brought into the global market, with the Chinese government in particular subsidizing capacity. If that sounds benign, it wasn’t. It hurt, and Canada’s plastics processors and moldmakers often took it right on the chin. “Offshoring had a huge and negative impact on our business,” said Brian Holmes, vice president and general manager with Surrey, B.C.-based custom injection molder Columbia Plastics Ltd. “Customers moved production overseas to try and pare costs out of their systems, which resulted in a lot less business to quote on. Simple, inexpensive products were not being put in front of us, which forced us to change the types of products we were making. Overall, if a molder didn’t have some kind of specialty niche through the early 2000s, it could get into trouble.”

As offshoring gathered momentum, Columbia Plastics, for one, pivoted away from the electronics work that was shifting en masse to China, temporarily stemming the tide by adding some assembly work. It then became a full-on medical parts molder. “The type of complex, low-volume products we began manufacturing were not economical to make overseas,” Holmes said.

But it was the moldmakers and mold component suppliers that became the true poster children for the devastation caused by offshoring. “As the automotive sector transplanted manufacturing to overseas locations, die and mold makers were left reeling, particularly small, family-owned shops with five to 100 workers,” said David Palmer, chairman of the Canadian Association of Mold Makers. “An estimated 150,000 tooling jobs have been lost in North America since 2000 due to offshoring.”

WAGE WARS
Offshoring was a complex process, to be sure — and grew to involve not just physical relocation of manufacturing, but complex webs of partnerships and outsourcing arrangements between domestic and overseas product makers — but in essence it boiled down to one thing: saving money on labour. Intriguingly, cost factors are now a key consideration for many companies that are deciding to relocate their manufacturing to North America. The difference in labour costs is still significant, but it has narrowed markedly as wages in China have risen, along with other expenses. As noted in a 2014 Time magazine article, China’s average hourly wage was only US$0.50 in 2000, but is projected to hit US$4.50 by mid-2015; and the cost to ship a 40-foot container from China to the West Coast of North America rose from US$1,184 in 2009 to US$2,302 in 2013.

As China’s cost advantage erodes, the lure of North America grows stronger, helped by several other factors. “Thanks to the boom in North American oil and gas, Canada and the U.S. now both possess an abundance of inexpensive energy, making them increasingly attractive locations for manufacturers that are energy intensive or that can use natural gas as a primary input,” said Carol Wingard, a managing director with L.E.K. Consulting. The clear winners are chemicals and petrochemicals — and, by extension, plastics — and also sectors that serve those industries. “For industries like chemical processing or metals manufacturing, energy costs are a much bigger deal than for machined and electronic goods, and could certainly cause companies to relocate,” Wingard continued.

North American manufacturers have also closed the gap somewhat by enhancing their productivity and their use of automation. Montreal-based injection molder Mega Brands is a case in point. The company had introduced its Mega Bloks line of stackable plastic brick toys in 1985, began manufacturing the blocks in China with a series of subcontractors in 1990, and by 2006 was making 80 per cent of its product in China. But the pendulum began swinging back five years later. “Operating costs at our facility in China were going up, so in 2011 we invested $10 million to boost our production capacity in Montreal by adding equipment and the latest tools as we began returning work from China,” said Jean-Francois Albert, vice president of manufacturing with Mega Brands. “We were able to bring about 80 per cent of our molding back to Canada mainly because today’s automated counting equipment made it possible. We mold an average of seven million parts per day in Montreal, in a wide variety of sizes, shapes and colors, making it potentially difficult to obtain the accurate part counts per product bag that our customers require, and convincing Chinese factory owners to invest millions of dollars in this automation was difficult.”

The latest injection molding machines also played a factor. “Molding machines in North America are getting faster,” Albert continued. “We’ve improved our cycle times from 30 seconds in an eight-cavity machine to 10 seconds in 32-cavity machines, which is must faster than the machines we’re running in our Chinese factory.”

Another factor driving companies to manufacture in North America is the growing desire to locate their production near their customers, so they can respond quickly and efficiently to customer needs and drive growth while simultaneously de-risking the supply chain. “It can be difficult to get the same quality level to serve your customers if your supplier networks are far away,” Albert said. Which can be a problem for seasonally-oriented end products like Mega Brands’ children’s toys. “Since a large percentage of our business is centred on Christmas, we can’t afford to take chances on delivery, which was another reason to return manufacturing to Montreal,” he continued. “The logistics of getting our products shipped from China to Canada in time for the holiday shopping season was always a challenge.”

HOLA, MEXICO
But if you think the manufacturing turnaround towards Canada and the U.S. is unstoppable, you might want to think again. For one thing, manufacturers in low-cost countries such as China are also raising their games, not least by improving their own uses of automation.

Second, a recent Supply Chain Optimization study by Miami, Fla.-based business advisory firm The Hackett Group debunked what it calls “the myth” that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. “The reality is that the net amount of capacity coming back barely offsets the amount that continues to be sent offshore,” the study noted. And just to dump some more rain on the parade, the Hackett Group study highlighted a basic fact: reshoring doesn’t necessarily bring work back to Canada. Or as the report put it, “few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries.”

By “low-cost countries”, it means Mexico, and many Canadian plastics processors no doubt agree. “Based on talks I’ve had with other Canadian molders, a large percentage of the work being returned from overseas is indeed going straight to Mexico,” said Brian Holmes. “That’s less true for complex, higher end products such as medical components, but for inexpensive consumer goods, Mexico is a new go-to destination.”

And that goes double for molds, tools and dies. “Mexico is becoming the new China, but I still consider this an improvement for Canadian and American toolmakers because it allows them to react to demand in a better manner,” said David Palmer. “Numerous tool shops in Windsor, Ont., for example, now have satellite operations in Mexico, and there is huge demand for parts suppliers to have operations in Mexico to satisfy the Ford, General Motors, Volkswagen and BMW plants already in that country. The Tier One suppliers — our customers — require nearby tool shops to satisfy not only the tooling demand, but also engineering changes and mold repairs.”

So is reshoring for real? The best answer might be a nuanced “yes.” “In general, we don’t expect many companies to close their existing facilities in China and to reshore them in North America,” said Carol Wingard. “But we do expect many companies to locate new manufacturing facilities in North America, particularly in sectors such as aerospace and defence, industrial manufacturing, oil and gas, and the automotive industry. The bottom line is that companies will locate close to where their growth is originating.”

And if it doesn’t exactly amount to a renaissance, it’s definitely a welcome course correction.
Not unlike what the Leafs could use right about now.


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