The Wall Street Journal is running a story today that suggests the offshoring trend is reversing --Stung by Soaring Transport Costs, Factories Bring Jobs Home Again:
The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.
But the point of the story is more than just shipping costs:
Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient Overseas Container Lines in San Ramon, Calif., a major shipping line, says he's heard from customers who are moving production back to the U.S., including a maker of steel pans for car engines.
"I believe a decent amount of production could come back into the States within five years, not everything," he says. "But it won't be because of transport costs -- it'll be because other production costs have gone up and companies have realized they can have better control over their production when it's closer to home."
The question of production location is a complex one. Shipping costs are only part of the equation (admittedly a large consideration). Everyone talks about needing to be close to their markets (see earlier posting on the distributed company and "gateway" sites). In addition, companies tend to cluster in the certain areas. As the Journal story notes, Asia has become an electronics cluster which gives it a competitive advantage beyond low cost production.
Yesterday, the Brookings Institution held a conference on metropolitan America. One of the sessions on innovation stressed the importance of economic clusters. During the discussion, it was noted that clusters may be the way to bring production back to the US.
I tend to agree. As the I-Cubed Economy develops, production will become more information and knowledge intensive. It will also become more customer-driven. That will give the competitive advantage to companies who are simultaneously closely tied into innovation networks and into their customer base. This argues for locating facilities in multiple clusters rather than searching for the lowest cost production site. Low cost production (with shipping costs figured in) will continue to be a factor in some production. But more and more production is likely to be based where there is access to key resources: ideas and customers. Such is the economic logic of the Intangible Economy.
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