A Chinese garment maker’s plan to spend $20 million building a factory in Little Rock is an example of a manufacturing phenomenon that is picking up steam as automation begins to wash out the labor cost advantage that for decades enticed manufacturers to move overseas.
The 400 jobs that Suzhou Industrial Park Tianyuan Garment Co. expects to create in central Arkansas over the next four years will join about 100,000 manufacturing jobs that have been “reshored” in the past five years, 60 percent of them from China.
When plants built in the United States by foreign investors like Tianyuan are included, the number of new manufacturing jobs jumps to 250,000, according to the Reshoring Initiative, a nonprofit based in Kildeer, Illinois.
Last year, America gained about as many jobs from such foreign direct investment as it lost to offshoring, the organization reported. Perhaps a quarter of the manufacturing that moved overseas — although certainly far fewer jobs — could be profitably reshored, the Reshoring Initiative estimates, and industry experts suggest that the most promising products are those that could be made in smaller quantities to respond quickly to local market demand.
Tianyuan announced in October that it will open a plant to manufacture Adidas brand clothing somewhere in the Little Rock area by the end of 2017. The company plans to pay employees an average of $14 per hour.
Tianyuan will be the first Chinese-owned garment plant in the United States, but two Chinese textile plants have opened in South Carolina, one in 2014 and one in 2015.
The Reshoring Initiative reports that 30 apparel/textile companies reshored in 2015; only the transportation equipment manufacturing sector saw more companies return last year.
While rising wages in China are often cited as the impetus for the trend toward more U.S. manufacturing, local and national sources suggest that’s an oversimplification. Low-skill workers in China are still dirt cheap, earning perhaps 10 percent the annual wages of similarly low-skilled workers in the U.S., said Harry Moser, founder and president of the Reshoring Initiative.
But the Tianyuan plant in Arkansas will use highly automated robotic equipment, which will require fewer workers overall, but greater skills. And China, despite its massive population, has a skills gap that its centralized government frets about in official reports.
That shortage has raised the wages commanded by higher-skilled workers in China to perhaps half that of a similarly skilled American worker, Moser said, cutting into the margin that made manufacturing in China attractive. Michael Pakko, state economic forecaster for the University of Arkansas at Little Rock’s Institute for Economic Advancement, said American workers are also more productive, cutting further into the margin.
More Than Wages
By 2014, according to the Boston Consulting Group in Massachusetts, the cost advantage of manufacturing in China rather than the U.S. had shrunk to less than 5 percent, largely because of logistics costs. John Kent, director of the University of Arkansas’ Supply Chain Management Research Center, said decades of experience with offshoring have made it clear that wages are only part of the calculus in deciding where to make a product.
Kent, who has no specific knowledge of the Tianyuan deal, said American companies originally moved production to China to take advantage of “almost free” labor. But they gave little thought to the cost of getting their products back to consumers here.
“Just the words ‘supply chain management’ did not come out of very many people’s mouths 30 years ago,” he said.
Once the companies started sending jobs overseas, they had to manage costs they’d never had to before, Kent said. That included buying, transporting and storing raw materials, then transporting and warehousing finished products.
The Reshoring Initiative claims a typical international shipment costs twice as much and takes five times as long as domestic shipping, and the timetable for delivering finished goods from overseas is less predictable.
For most manufactured products, the cost savings is still worthwhile, Kent said.
“About 80 percent of those products that we moved out of the factories in the United States to China, that made a lot of sense,” he said. But the balance, he said, could be done better back home — and the Reshoring Initiative agrees, although it put the share of offshored products that could be profitably reshored at about 25 percent.
Kent said the manufacturing that could best be returned to the U.S. are customized products that don’t need to be mass-produced and products that consumers need right away. Examples he offered were athletic apparel celebrating the Chicago Cubs’ World Series victory or some similar product celebrating a high school’s state championship.
Such specialty products certainly can be made in China, but it could take months to get them to the U.S. market, while a domestic plant could get them in the hands of consumers within days, while the excitement driving purchases is still fresh.
Tianyuan makes casual garments and sportswear, most of it with the Adidas brand, but some for Reebok and Armani. Kent, the UA professor, said it would make sense for Tianyuan to manufacture its customized, higher-end products that have higher profit margins in Arkansas.
Moser, founder of the Reshoring Initiative, said Tianyuan wouldn’t be putting a plant here if it didn’t believe the plant would be profitable.
“The Chinese company, almost surely, their cost to produce a product is going to be higher here than it would be in China because the labor costs are higher,” he said. “But when you factor in the fact that they can sell the retailer what he needs [now] instead of what he thinks he might need in six months, when you eliminate the duty and most of the freight and substantially reduce the inventory so you don’t have the warehousing, … you have all kinds of advantages like that.”
Chinese-made products must be ordered in February or March in order to be on retailers’ shelves in time for Christmas shoppers, Moser said. “If you order from Arkansas, you can probably still order some in October or November and have them to sell in December. It’s easier to match supply to demand if you produce local to the market,” he said.
And matching supply with demand can improve the bottom line because markdowns are one of the highest costs in retail — a cost that isn’t mitigated by making more items cheaper.
“They say it’s better to produce in small quantities and not have excess supply than it is to produce in big quantities at a great distance and have to discount, say, 40 or 50 percent of your product to get it to go away,” Moser said.
There is also growing demand for something that the Tianyuan products will have once the Arkansas plant is up and running: a “Made in USA” label. Moser said the manufacturer may be able to charge a premium for American-made products, which are perceived to be of higher quality.
American-made products are also in demand by the world’s largest retailer. Wal-Mart Stores Inc. of Bentonville has committed to purchase an additional $250 billion in products made, sourced or grown in the U.S. by 2023.