Considering the trade climate, where should companies locate to best serve the US market? Harry Moser and Michelle Comerford from the Reshoring Initiative and BLS & Co, respectively, offer a comparative analysis between the US, China and Germany in the October 2019 issue of fDi Intelligence Magazine.

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Supply chain and plant siting decisions are becoming more complex, including as they do US tax and regulatory cuts, the magnitude and uncertainty of president Donald Trump’s tariffs, the rapidly rising wages in China and the plateauing of global trade. Many international companies are wrestling with the question of where they should manufacture products in order to best serve the US market.

This is a decision that demands a wide look at several factors. The sample case, below, provides a general framework that can be adapted to a company’s specific location decision.

A continental decision

Consider a German company without any US factories deciding where to supply the US market from, be it a new or expanded factory in Germany, a new factory in China, or a new factory in the US.

Assume there is no extra capacity available anywhere, and product engineering will remain in Germany. The objective is to maximize near-term profitability and create longer term stability.

The location analysis is broken up into four sections: quantifiable factors; qualitative factors; total cost of ownership (TCO) to account for 'hidden' costs in offshore sourcing; and a rough return on investment (ROI) analysis.

Quantifiable factors

For the sample case, data pulled from Trading Economics, Deloitte, Eurostat, Xinhua News, CBRE and TaxFoundation.org helps carefully compare eight quantified factors, most of which apply to any manufacturing operation. Categories include manufacturing labour rate per hour; natural gas, electricity and land costs; corporate tax rate; manufacturing competitiveness; wages; and local supply base.

Apart from labor rate per hour ($22), the US comes out on top in most categories. An important note is that although Chinese wages ($4.80) are only about 20% of those in Germany ($29) and the US today, US and German wages are roughly flat. Conversely, Chinese earnings have been rising by 10% to 15% per year for about 15 years and are expected to continue this trend.

There is also a quantifiable benefit of having a ‘Made in the USA’ product. According to a 2017 survey from Reuters/Ipsos, about 37% of consumers say they will pay at least 10% more for that label.

Qualitative factors

The next step is to consider qualitative factors. Companies are urged to complete a form of analysis – this could be a chart ranking factors 1 to 3, with a score of 1 being 'desirable'. A preferred location – after vetting factors related to the product itself, manufacturing demands, logistics concerns, market conditions and company culture – would come out with the lowest total ranking. In an analysis conducted for the purposes of this sample scenario, the US came out on top, ‘winning’ cross-comparisons in product demand, labor, utilities, logistics and more, the US's score being 42, Germany's 47 and China's 65.

Quantity and quality of skilled workforce is required for 10 of the reviewed fields and is frequently the top priority for site selection. Increasingly, more countries are experiencing shortages, as more young people choose university education instead of apprenticeships. In Germany, the apprenticeship program is world class but has recruiting issues. The Chinese have quantity but still lack top-level experience. As for the US workforce, it remains experienced but has lacked a strong apprenticeship program.

With regards to the latter, Mr. Trump and US manufacturing companies recently committed to a $200m-plus expenditure and 4 million apprentices over the next few years. In addition, credentialing programs, such as those through NIMS and MSSC, are growing rapidly.

Total cost of ownership

When Chinese wages and prices were extremely low, most companies safely relied on wage rates and ‘ex works price’, or the purchase price of a product produced overseas not including shipping or other applicable costs, to select a site. With Chinese wages now on the rise, an accurate location analysis requires a TCO assessment, or similar, as a consideration metric. The TCO Estimator, a free tool offered online by the Reshoring Initiative, adds duty and freight, carrying cost of inventory, intellectual property (IP) risk, the impacts of fast delivery and speed to market for new products, the value of a made-in-country label and 21 other factors.

Based on data collected by the Reshoring Initiative, less than 10% of products produced in China have a higher ex works price than those produced in the US, but when TCO is considered, that number increases to 25%. When comparing the US with Europe, 25% of products have a higher price in Europe than the US, and the number increases to 40% when TCO is considered.

ROI analysis

Finally, companies should consider data from the preceding factors to estimate a rough ROI for each alternative. In the sample case, the US ultimately comes out on top based on an after-tax ROI of 18%, with China at 14% and Germany at 4%. The benefits widen even more for the US over China when the Trump tariffs of 25% are factored into Chinese imports.

Note, these percentages factor in revenue, manufacturing costs, hidden costs, taxes and inventory investments, arriving at after-tax earnings as a percentage of an investment.

Also, US revenue is higher due to a price premium for a 'Made in USA' label and the Chinese hidden cost category remains the highest due to distance from market and IP risk. Also, investment is assumed to be roughly the same, although it may be lower in Germany in this case if an existing factory were expanded.

The consensus?

The results of this sample location analysis are consistent with recent trends toward a plateauing of international trade and increased localization. That said, the following takeaways can be applied to most location decisions of a similar nature:

• A US location likely requires a large enough North American market to absorb the output of a factory.
• If a project’s priorities match most of the qualitative factors discussed above, then the US may be the location of choice.
• If a 'Made in USA' label is not feasible for a product, then the US ties with China (without the expanded tariffs in place).
• If most of the factors are not relevant, the US ties with or trails China (without the new tariffs from the current administration).
• If there was a measurable benefit in locating near the existing factory and a skilled workforce was required, Germany would be the choice.
• Production to serve the German or Chinese markets would, in most cases, be most profitable done locally.
• Other countries in south-east Asia may offer a better alternative to China to avoid the threat of tariffs.

When evaluating where to locate to best serve the US market, keep in mind that every project is different and will have varying requirements. However, the key to making an informed decision involves thorough analysis of all operating factors, not just wages and perceived costs. Trade conditions and current events also tie into this sphere of international site selection.

Note: this article also draws on research from BLS & Co and additional Trading Economics data.

Harry Moser is the president and founder of the Reshoring Initiative, where he focuses on US competitiveness and placement of manufacturing jobs. Michelle Comerford is the industrial and supply chain practice leader at Biggins Lacy Shapiro & Company, where she develops corporate location strategies and executes site-selection projects for BLS & Co.’s manufacturing and distribution clients.