Higher shipping costs are casting a chill on what had seemed an unstoppable trend toward the offshoring of U.S. jobs and production. In an April survey of nearly 1,000 companies by RSM McGladrey, the number planning to move offshore fell by 20% from a year earlier.
A follow-up report that the Minneapolis-based consultants released on July 31 showed that businesses are increasingly focused on their transportation costs. In a survey of 357 small and midsize businesses, 52% said they expect "dramatic increases" in their freight costs, vs. 20% that identified transport charges as a worry three months earlier.
"Where things are being made is going to change," says McGladrey executive Tom Murphy. There already are tentative signs that well-established patterns are in flux. Through July 19, U.S. railroads had carried 5 million shipping containers, down 3.4% compared with the same period last year.
In May, Swedish furniture maker Ikea announced plans for a 930,000-square-foot manufacturing facility in Danville, Va. The company decided to open its first U.S. production facility in part because the cost of shipping its Expedit bookshelves, Lack coffee tables and Besta entertainment centers exceeded the cost of making them, says spokesman Joseph Roth.
One industry already might be benefiting from near-sourcing, Rubin says. The first four months of this year, U.S. steel imports from Australia and five Asian nations (China, South Korea, Japan, India and Taiwan) fell 14.6%. That's helped domestic steel producers, such as U.S. Steel, Nucor and AK Steel. Last month, AK Steel of West Chester, Ohio, reported a record second-quarter profit of $145.2 million, up 32% from the year-earlier period.
For the first time in more than 10 years, rising transport costs are overwhelming the advantages of cheap foreign labor, making made-in-the-USA steel products more competitive in the domestic market, says Rubin. And the same thing is likely to happen in other industries where transport costs represent a significant share of the final price, such as furniture, apparel and footwear. More than half of China's manufactured exports to the USA are similarly "freight-intensive," he argues.
"I'm not saying all of that's coming back to Pittsburgh. … But this is something that's already started," he says.
Still, it's far from clear that the rise in transport costs explains what's happening in global trade patterns. The decline in container shipments might reflect the slowing U.S. economy. Some companies are relocating production because inflation in developing countries such as Vietnam and China is elevating costs. And the domestic steel industry's improving outlook might owe more to the falling U.S. dollar, which makes U.S.-made products more attractive to foreign buyers, and to changes in Chinese policy that began discouraging runaway steel exports in the middle of last year.
"I'm not sure we would attribute much to the higher shipping costs. … I don't think that's a significant factor," says AK Steel's Alan McCoy.
No big turnaround expected