American manufacturing is getting a boost. A recent two-day summit in Orlando brought an announcement from Walmart that they’ll be investing $50 million over the next decade in moving towards American-made products. But what does that really mean?
In terms of business, Walmart does an astronomical amount of purchasing globally. The $50 million over the next decade is only 10% what they normally sell in retail every year so many critics are saying Walmart isn’t doing enough to bring manufacturing back. But Walmart argues that if other retailers do the same, that number could easily move towards $500 million over the next ten years.
Why now? Labor costs are rising in China and other developing countries where we source many of our goods sold in stores like Walmart. They’ve already risen by 156% from 2000 to 2013 and combined with shipping costs, the price of labor will create a tipping point where suppliers will need to move back the United States, Mexico, or Canada to reduce their costs. We’ve been talking about the phenomenon of “onshoring” for a while, and we expect to see it speed up.
For Walmart suppliers, there are also new rules about ethical sourcing. Factory fires in Bangladesh and other bad press have caused the retail giant to change the rules for manufacturers. Suppliers must now have a physical presence — a team member on the ground — in any location where there are products being made, and there are specific requirements for the wellbeing and safety of the workers in overseas plants. The complexity of the new rules is eating away at the savings gained by going overseas.
Canada’s labor costs are generally higher than those in the U.S., but Mexico’s are lower. The manufacturing renaissance in the U.S. may depend on our ability to compete on efficiency with Mexico. Boston Consulting Group reported recently that U.S. companies see crime and corruption as high costs of doing business in Mexico; an improvement in that area could make Mexico a much more attractive option.
On the other hand, Mexico doesn’t have China’s workforce. Particularly for states with lower wages and limited union involvement in manufacturing, Walmart’s move could be the boost U.S. manufacturing needs.