Liang 1

Loss of Interest in Overseas Outsourcing

For over a decade, China has been a clear choice for building manufacturing plants, with
its exceptionally low duties, transportation costs, labor wages, and currency, as well as its
growing market. However, in recent years, the advantages of producing in China have
significantly shrunk, thus many companies are now insourcing to the U.S. as opposed to
outsourcing to Asian countries. Therefore, the increase in transportation costs and duties, the
increase in labor costs in China, and the productivity force in China have precipitated the loss of
interest in overseas outsourcing, directly relating to the resurgence of the U.S. manufacturing
industry.
Beginning in the 1980s, East Asian countries such as Taiwan have been rising to replace
U.S. as the prominent world manufacturer as production of apparel, toys and electronics began to
swarm into Asian countries. Gradually, as China became more involved in foreign affairs after
issuing its Open Door Policy, it established itself as a manufacturing country. In the last decade,
China has become the default manufacturing site for companies worldwide, which was largely
due to its unbelievably low wages. According to the U.S. Bureau of Labor Statistics, the average
U.S. factory worker wage was around seventeen dollars per hour in 2000, while the average
Chinese wage was merely fifty cents per hour (Sirkin, Zinser, Hohner). This was the main appeal
of manufacturing in China, as it is an incredible advantage for companies because it easily
increases their profit. While companies were aware of the comparatively poorer quality material
and the low productivity, which includes the speed of manufacturing, as well as the quality of the
goods, the advantage of the low labor wages outweighed the disadvantages, as companies saved
an average of sixty-five percent on labor costs (Sirkin, Zinser, Hohner).

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Similarly, transportation costs were much lower in the early 2000s, making overseas
outsourcing more pragmatic, as Chinas low wages still benefitted the companies even when
transportation costs and duties are included. Additionally, Chinas currency in the 2000s was
artificially low, at merely eight RMB to one USD (US Dollar to Chinese Renminbi Chart), which
was a strategy employed by the Chinese government in an attempt to attract foreign investments.
By artificially lowering the value of RMB, the Chinese government was able to attract U.S.
companies, as it further lowers the already low costs of Chinese labor. All these advantages
combined precipitated manufacturers increased interest in China in the last decade. The increase
of imports from China rose from six percent in 1999 to nineteen percent in 2009 (Transportation
Cost Equivalence Line 3).
Despite the significant advantage of outsourcing to China in the last decade,
manufacturers are now turning their attention back to manufacturing in the U.S., partially due to
the rise in transportation costs in China. The recent Shale Oil Boom led to a decline in U.S. oil
prices by nearly a quarter, while Chinese retail petrol and diesel prices fell by only half that
amount, or eleven percent (Hornby). This puts Chinese retail petrol prices about twenty
percent above US prices, making it much more efficient, more eco-friendly, and less expensive
to manufacture in the U.S. than overseas (Hornby). Thus, many companies now realize that the
little savings they get from foreign labor are lost in transportation costs. According to James
Hagerty, who specializes in covering manufacturing for the Wall Street Journal, those who
previously overlooked the slow transportation from China to the U.S. due to the low
transportation costs are now skeptical about outsourcing, as the costs are increasing; moreover,
they now see an advantage in manufacturing in the U.S. for almost the same price, but a faster
delivery. In our current, fast-paced society, speed is vital, and slow transportation especially

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affects the apparel industry, as the targeted audience for most products are in the U.S. and the
time wasted on transportation makes it difficult for companies to satisfy consumers demand for
the current styles before their competitors (Hagerty).
In addition to rising transportation costs, manufacturers are moving back to the U.S.
because of the required import and export taxes on their goods, which are rising significantly.
Under Chinas 2013 Customs Tariff Implement Plan, companies are now expected to pay for
their goods at a transacted price, which minimizes their potential profits. The more hefty duties,
however, are paid to the U.S. government as import taxes (Zhang). A recent controversial tariff
was the Commerce Departments approval for steep tariffs on imports of solar panels from both
China and Taiwan. According to Diane Cardwell of the New York Times, just three months ago in
early December, the department raised the duties of solar panels that are made in China from
twenty-seven to seventy-eight percent, and the duties on imports of solar cells that are made in
Taiwan from eleven to twenty-eight percent (Cardwell 2). This exemplifies the continuing trend
of rising duties on imported goods, specifically from countries like China, in order to benefit the
U.S. economy and increase employment in the U.S. While some workers and factories in the
U.S. benefit from the increase on import taxes, most companies that outsource overseas fall
victim to these tariffs, propelling them to move their manufacturing plants back to the U.S. to
avoid these exorbitant duties. The effect of the duties align with president Obamas campaign for
Insourcing American Jobs, in which he laid out over eight proposals in an attempt to
discourage outsourcing and encourage insourcing (President Obama Issues Call to Action). He is
proposing incentives for manufacturing in the United States to give a twenty percent income
tax credit for the expenses of moving operations back into the United States to help companies
bring jobs home[and] to close loopholes that allow companies to shift profits overseas, in

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addition to eliminating tax advantages (Fact Sheet: President Obamas Blueprint). With the
government offering incentives for insourcing, as well as the diminishing advantages of overseas
outsourcing, many companies will shift their manufacturing back to the U.S. to take advantage of
these new proposals and to gain publicity, as many companies that are participating in the
Insourcing American Jobs movement are gaining recognition by the White House.
Furthermore, as a result of Chinas remarkable economic growth, prices in China have
increased exponentially in the past decade. Electricity, an integral part of manufacturing, surged
fifteen percent in three years (Sirkin, Zinser, Hohner). This was the result of the switch in 2010
from using industrial coal, the cheapest fuel around, to electricity, which is now used in over
twenty-eight percent of China (Hornby). This change was implemented to control the pollution
caused by coal in Chinese cities; however, this repels many manufacturers, as electricity can
account for up to 90 percent of a factorys cost (Hornby). In addition to an increase in electricity
prices, there has also been a surge in real estate prices. 1The real estate prices vary from city to
city in China, but ranges from eleven dollars per square foot in the coastal city of Ningbo to
twenty-one dollars per square foot in the industrial city of Shenzhen. The national industrial land
average cost in China is around ten dollars per square foot, which serves as a direct contrast to
the cost in the U.S., where the cost per square foot is only $1.86 to $4.56 per square foot in
Alabama and $5.28 per square foot in California. While land cost in China is comparatively
lower inland, more expensive transportation expenses would compromise the slightly lower land
cost. This cost gap brought about many companies move back to insourcing, as land prices are
estimated to be even more costly in the coming years.

Boston Consulting Groups analysis of real estate prices in China, as well as the land cost in the
U.S.

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Another integral part of the manufacturing exodus from China back to the U.S. is the
significant increase in labor costs, the largest appeal of manufacturing in China which initially
led to overseas outsourcing in the late twentieth century. The dramatic increase is mainly due to
the growing number of cost-conscious workers, as China quickly becomes one of the important
world powers. As a result, the Chinese people, who, unlike before, are becoming more exposed
to international news and culture and are now aware of the wage inequality in China, are now
acknowledging their abilities to better their wages, which has led to the growing interest in
higher wage demands and strikes. According to research conducted by University of
Pennsylvania, between 1997 and 2007, there was an average of 35.5 strikes per year; however,
this statistic grew exponentially to a startling average of 55.3 strikes per year between 2007 and
2010 (Elfstrom, Kuruvilla). A major victory for the workers was the highly televised Honda
strike in 2010, which was the first collective bargaining in China (Meyerson). This strike,
which resolved when Honda gave its employees a thirty-two percent wage
increase (Meyerson), set a precedent for later strikes, like Nokia, Walmart, Yue-Yen Shoe, that
are gradually becoming increasingly ubiquitous amongst the Chinese manufacturing
industry(Meyerson). These strikes have been instrumental in the decreasing wage gap between
the U.S. and China, in which companies who were saving an average of $1.39 per part in 2000
are now estimated to save only around $0.83 per part (Sirkin, Zinser, Hohner).
Meanwhile, as strikes and demands in China increase, the opposite is happening in the
United States. As a result of increase in unemployment, unions have become more flexible and
corporative to secure employment before demanding high wages; moreover, strikes have been
less frequent, as many have tolerated wage fall in order to keep their jobs (Plumer). Furthermore,
compared to China, the U.S. has a much more highly skilled labor force in comparison to the

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inept labor force in China, meaning that it will be able to produce higher quality goods and
qualify as handmade, which will increase sales and profits for the companies for similar costs
(Li). As China began to lose its top appeal of cheap labor and become similar to the labor cost in
the U.S., manufacturers are moving back to insourcing, as they ultimately prefer manufacturing
in the U.S. for its higher quality goods and close vicinity to the market.
Additionally, productivity rates in China is at a constant of thirteen percent, while the
productivity of the U.S. has remained a hundred percent throughout the years. This statistic
reveals the amount of goods that can be produced in a give amount of time, taking into account
the quality of the product. Thus, the low productivity rates in China have also repelled many
companies from investing in overseas outsourcing.
Machinery is also a heavy and influential factor in the switch to insourcing. As
technology develops, machinery is vital in the manufacturing industry. However, because
factories need new machinery despite the location, this propels the U.S. companies to gravitate
towards insourcing, as the cost is inevitable and China has lost its main appeal of cheap labor.
Lastly, China is beginning to become infamous for stolen goods from factoriesboth
tangible goods and intellectual properties. 2Many U.S. manufacturers and companies have
reflected the large amount of stolen or defected goods in Chinese factories, which have led to
companies losing money, as opposed to profiting from Chinese labor. This is leading to
insourcing, as companies trust U.S. workers more than they trust foreign workers. In addition to
tangible stolen goods, many have brought attention to the widespread, iniquitous crimes of
stealing intellectual property. When sending goods to be manufactured in China, companies need

Published on the Specialty Equipment Market Association, Blakeslee warns the dangers of
outsourcing to China and recommends four safety precautions to take before entering the
Chinese market.

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to make sure all aspects of the designs and prototypes are trademarked and copyrighted. If they
are not properly copyrighted, Chinese factory workers or manufacturers who have unlimited
access to the design will steal the intellectual property, which may lead to bankruptcy for U.S.
companies, as Chinese companies can easily manufacture spurious goods that are seemingly
identical and can easily beguile consumers. While this threatening situation may not occur at all
factories, merely the connection between the sordid crimes of intellectual property theft and
overseas outsourcing to China is enough to repulse companies to manufacture back in the United
States.
To label the now popular campaign for insourcing, the term Made in America
Movement is now popular amongst insourcing enthusiasts. To encourage the increase
propensity for Made in the USA products, the Made in America Movement includes manifold
companies, ranging from manufacturers to medical equipment companies who have committed
to insourcing. Out of these companies who are carrying the Made in USA label, (MAM
Members), the most prominent labels are American Apparel and Keen Footwear.
Simply by its name, American Apparel, the brands patriotic name indicates its unique
manufacturing style. 3One of the pioneers of the Made in America movement, American
Apparel had introduced a new type of clothing and garment manufacturing to the United States.
Its growing appeal to the public has shown and proved that it is possible to build a successful
business regardless of manufacturing in the United States. American Apparel has set a precedent
for manufacturing in the United States, showing that by marking their price to match the quality
of the material and the wages the U.S. workers deserve. Additionally, according to Shan Li of the

The information from this paragraph regarding the details of American Apparel factories are
taken from Li.

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Los Angeles Times, the Los Angeles based company have factories that operate in different ways
than normal factories overseas do. Li stresses that motivation is key in the factories. The
factories method encourages workers to work for themselves, similar to companies that offer
commission to their employees. Li notes that Employees are paid for each completed garment at
a piece rate, rather than the conventional method oft ascribing tasks to workers. This takes
advantage of the skilled labor force in the U.S., as well as encourages the workers to work at a
faster pace. In addition to the success of the new operating system in the factories, all the clothes
are made in Los Angeles, California, which is close to consumers and allows for a faster style
delivery to keep up with the current fashion.
Another company that is one of the pioneers of the Made in America movement is
Keen, an outdoor sportswear company. James Curleigh, the CEO of the company, is now a
supporter of President Obamas initiative for insourcing American Jobs, in which he supports
several companies in their strategy of manufacturing in the United States (President Obama
Issues Call to Action). 4While it is currently successful and part of President Obamas SelectUSA
program, which seeks to highlight the advantages of U.S. investments and manufacturing, Keen
initially experienced difficulty in producing in the U.S. due to its small revenue and modest size.
However, as the company grew, Martin Keen, founder of the company, decided to move its
production plant and headquarters to Portland, Oregon, and has since been manufacturing there,
making the company one of one handful successful apparel companies that is manufacturing in
the U.S. and named 2003s "Launch of the Year by the leading trade publication, Footwear

The information about Keens relocation of their manufacturing plant and their involvement in
the SelectUSA program is taken from Siemers.

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News. Keen has shown tremendous growth, and demonstrates that companies are able to achieve
success even manufacturing in the U.S. (Keen's 10 Year History).
As companies begin to realize that China is becoming a less pragmatic choice for
manufacturing, The U.S. will become an increasingly attractive option, as it provides a
favorable investment climate(Sirkin, Zinser, Hohner). Resulting from the combination of many
factors, including the increase in transportation costs and duties, the increase in labor costs in
China, and the productivity force in China, companies are now starting to see the advantages of
insourcing back in the United States, as the advantages of overseas outsourcing are now
shrinking to the point that overseas outsourcing is causing companies to lose rather than save
money. This Made in America movement is exemplified through several companies, including
American Apparel and Keen Sportswear.

Work Cited

Liang 1 0
Blakeslee, Merritt R. "Sourcing Your Products From China." Specialty Equipment Market
Association. Web. 26 Mar. 2015.
Cardwell, Diane. "U.S. Imposes Steep Tariffs on Importers of Chinese Solar Panels." The New
York Times. The New York Times, 3 June 2014. Web. 30 Mar. 2015.
Elfstrom, Manfred, and Sarosh Kuruvilla. "The Changing Nature of Labor Unrest in China."
University of Pennsylvania. University of Pennsylvania, 2 July 2012. Web. 20 Mar. 2015.
Fact Sheet: President Obama's Blueprint to Support U.S. Manufacturing Jobs, Discourage
Outsourcing, and Encourage Insourcing." The White House. The White House, 25 Jan.
2012. Web. 20 Mar. 2015.
Hagerty, James. "Why U.S. Manufacturing Is Poised for a Comeback (Maybe)." Wall Street
Journal. Wall Street Journal, 1 June 2014. ProQuest. Web. 11 Jan. 2015.
Hornby, Lucy. "Rising Energy, Transport and Labour Costs Squeeze Profits of Chinese
Companies." Financial Times. Financial Times, 3 Nov. 2014. Web. 20 Mar. 2015.
"Keen's 10 Year History." Keen Footwear. 1 Mar. 2013. Web. 23 Mar. 2015.
Li, Shan. Made in California; Fighting Stitch by Stitch; American Apparel has the
Largest Garment Factory in the U.S., but How Much Longer Can it Lose Money?" Los
Angeles Times. 3 Jun. 2012. ProQuest. Web. 9 Jan. 2015.
Meyerson, Harold. "Why China Has Strikes Without Unions." The American Prospect. The
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Plumer, Brad. "Is U.S. Manufacturing Making a Comebackor Is It Just Hype?" Washington
Post. 1 May 2013. ProQuest. Web. 10 Jan. 2015.

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"President Obama Issues Call to Action to Invest in America at White House Insourcing
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Siemers, Erik. "Manufacturing Locally Takes Keen to the White House." Portland Business
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Sirkin, Harold L., Michael Zinser, and Douglas Hohner. "Made in America, Again." Boston
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