May 24, 2012

Reshoring of Some Chinese Manufacturing Jobs Becoming Likely As Cost Gap is Expected to Shrink to Just 16 Percent Next Year

• Flow of Manufacturing Jobs Between China and the West to Equalize; China Could Suffer, as it also Faces Pressure from Low-Cost Labor Countries

MIAMI & LONDON, May 24, 2012 - The tide has begun to turn on the flow of manufacturing jobs from the U.S. to China and other low-cost countries, according to a new study from The Hackett Group, Inc. (NASDAQ: HCKT). Some companies are already reshoring a portion of their manufacturing capacity, and this trend is expected to reach a crucial tipping point over the next two to three years, as the total landed cost gap between the two nations continues to shrink, driven in part by rising wage inflation in China and continued productivity improvements in the U.S.

At the moment, China remains a manufacturing powerhouse, with nearly 75 percent of the companies surveyed having some manufacturing capability in China for at least three years, either directly or through contract manufacturers. The Hackett Group estimates that Chinese manufactured exports to the U.S. currently support between 15 and 20 million jobs in China.

The Hackett Group's study offered significant hope for the U.S. jobs market. The study found that companies are exploring reshoring as an option for nearly 20 percent of their offshore manufacturing capacity between 2012 and 2014. This repatriated capacity could roughly offset the jobs that will otherwise move offshore, indicating that the great migration of manufacturing offshore over the past several decades is stabilizing.

Reshoring is expected to become more viable with each passing year, as the total landed cost gap of manufacturing offshore shrinks. The Hackett Group's research found that the cost gap between the U.S. and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent by 2013. This trend is largely driven by rising labor costs in China, as well as rising fuel prices globally, which affects shipping costs.

"This is good news for the American worker as growth in the U.S. manufacturing sector keeps more high-paying jobs at home," said David P. Sievers, Principal, Strategy and Operations Leader for The Hackett Group.

Total Landed Cost Gap, 2005, 2010 and 2013 projection
Companies that participated in The Hackett Group study projected that by 2013 the total landed cost gap with China will have shrunk to only 16 percent, making reshoring a much more viable option.

The research found that the shrinking total landed cost gap could create a tipping point resulting in an acceleration of reshoring. "As the total landed cost gap falls below 15 percent, the economic opportunity will require more companies to rebalance their supply chains and move capacity back closer to customers in the U.S.," continued Mr. Sievers.

According to published reports, many large companies have made public plans to reshore portions of their manufacturing to the U.S. over the past two years, including Caterpillar, Nissan, NCR, Yamaha, Ford, and Electrolux. Earlier this year, both Boeing and GE said they were committed to moving parts of their offshore manufacturing capabilities back to the U.S.

Another significant finding from The Hackett Group study is the increased movement of lower-value manufacturing from China to other developing economies as companies under margin pressure search for lower wage rates outside of China. Countries including India, Thailand, Vietnam, and Brazil continue to successfully grow their share of global manufacturing as they become more cost effective countries for manufacturing. "The cost increases in China are impossible for companies to ignore," said The Hackett Group Chief Research Officer Michel Janssen. "As Chinese wage rates rise, companies are looking to maintain their competitive edge by either bringing that production closer to developed markets, moving it to lower wage countries, or increasing productivity in China."

About The Hackett Group, Inc.

The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies. Services include business transformation, enterprise performance management, working capital management, and global business services. The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement, and information technology, including its award-winning Oracle EPM and SAP practices.

The Hackett Group has completed more than 11,000 benchmarking studies with major corporations and government agencies, including 93% of the Dow Jones Industrials, 86% of the Fortune 100, 87% of the DAX 30 and 52% of the FTSE 100. These studies drive its Best Practice Intelligence Center™ which includes the firm's benchmarking metrics, best practices repository, and best practice configuration guides and process flows, which enable The Hackett Group's clients and partners to achieve world-class performance.