The Independent Market Observer

5/2/13 – Mean Reversion and “Onshoring”

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on May 2, 2013 10:42:40 AM

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Recently, I’ve noticed some pushback on the notion of onshoring jobs. In particular, some economists I respect have noted that there’s little aggregate evidence of a systemic change so far. Most evidence is anecdotal, they say, and overall manufacturing continues to be relatively weak, despite some signs of strength.

I agree with that, but I don’t necessarily think it disproves the onshoring case. What we’re talking about here is a multi-year process, which will start slowly and then gather momentum—exactly as the offshoring process did. Second, in a time of global economic weakness, it’s hard to discern a nascent strengthening trend against a backdrop of much stronger global weakening. Third, we continue to see signs that manufacturing in the least expensive countries has its own sets of problems, which are becoming increasingly public.

The factory collapse in Bangladesh, which has driven Disney to remove itself from the country entirely, is the latest example, but certainly not the only one. Wal-Mart and others are getting involved there because, politically, they have to. Companies are being held accountable for their suppliers. At the least, this mitigates the appeal of somewhat lower costs and suggests that greater control has its benefits as well.

Another factor is continuing wage increases and labor shortages in China. Several articles in the papers today deal with just that topic, detailing how wage and labor issues are driving low-end manufacturing out of China and into other countries, such as Bangladesh. At some point, as China becomes less wage-competitive—and companies see that other countries lack the same scale, and that all offshore markets continue to present reputational risks—moving back to North America becomes at least something to consider.

Note that I said North America. Mexico is benefiting from the relocation of Asian factories, possibly more than the U.S. so far. Even this, though, can indirectly benefit the U.S. in the form of reduced time to market and transit costs for U.S. companies, as well as an improved Mexican economy. Both would reduce immigration and also enhance Mexico’s ability to buy U.S. goods—benefits that jobs in China can’t provide to a similar degree.

The final reason I believe the onshoring trend is real is simple mean reversion. Any trend, including offshoring, will tend to go to extremes. Companies are now finding that many processes are better done here, even if it’s somewhat more expensive, as the other benefits more than offset the costs. It is this discovery that’s driving the onshoring trend.

This is a slow-moving trend, of course, and it won’t solve our problems today. Over the next five to ten years, however, we should see a revived manufacturing base that also produces other benefits across the economy—just one more piece of the general, and far too slow, healing process.

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