The reshoring move will simplify operations.
3D metrology provider FARO recently announced the signing of an agreement to outsource its manufacturing to Sanmina Corporation, a U.S.-based Fortune 500 Electronic Manufacturing Services (EMS) provider.
“As the next step in our business transformation, we plan to transition FARO production from our three manufacturing sites in Lake Mary, Florida, Exton, Pennsylvania and Stuttgart, Germany to Sanmina,” stated Michael Burger, president and chief executive officer at FARO Technologies. “While this decision is not easy as it directly affects FARO employees, once complete, our new operational model greatly simplifies operations, reduces costs and allows our management team to focus on the development and sale of differentiated technology to customers in our target markets.”
The phased transition to a Sanmina production facility is expected to be completed over the next 12 months, resulting in approximately $12 million in annualized labor and material savings. FARO believes the expected savings will have a negligible impact on 2021, followed by steady improvement through 2022, with the full benefit to be realized in the first quarter of 2023.
The company expects to incur a cash charge of approximately $6 million in the second half of 2021, primarily consisting of cash severance and total pretax charges of $15 to $20 million through the first half of 2022 when including the impact of facility and other asset write-downs. With these charges, the company expects it will fully realize the $75 to $85 million in restructuring charges announced in February 2020.
Key Drivers of Reshoring
Twenty years ago, it may have been surprising for a manufacturing operation to move into the U.S. According to the Reshoring Initiative, in 2003, about 140,000 American jobs were lost to offshoring. In 2014, the U.S. saw a net gain of 10,000 jobs returning to its shores. So, what’s bringing business back?
Changing Economic Factors in China and Other Manufacturing Hotspots
At offshoring’s peak, outsourcing manufacturing to China made sense due to lower labor costs and a larger available workforce. However, as China continues to develop its infrastructure and economy, workers in Chinese manufacturing hubs such as Shenzhen and Guangzhou earn higher wages, have greater mobility, and have more employment opportunities, such as service jobs. Costs are higher, while the quality and service weaknesses associated with some offshore manufacturing still persist. Companies that use offshore manufacturing may not see the value they did 20 years ago. In addition, running an offshore manufacturing operation often involves travel costs, communication problems, and longer shipping lead times. Especially now, as we’ve seen during the COVID-19 pandemic and the Suez Canal obstruction of March 2021, global supply chains come with risks. With higher costs and a less available workforce, offshoring may no longer be cheap enough to offset these risks and issues.
Rise of E-Commerce and Two-Day Shipping
The boom in e-commerce as the dominant way that consumers buy products, accelerated by the success of online retailers like Amazon and indeed by the pandemic, is changing the way products go to market. Flexibility is essential, and last-mile delivery is more important than ever. Historically, a manufacturing plant in China could ship a container full of products to American shores, and then products would be transported to distribution centers and stores. Now, consumers expect individual packages to reach their homes in a matter of days. With the flexibility the Internet is bringing to commerce, U.S.-based manufacturing and vertically integrated businesses may be poised to respond in a more agile way.
Increased Automation
The common perception is that automation kills manufacturing jobs, when in reality, automation is making manufacturing jobs easier, more attractive to workers, safer, and more competitive with less expensive labor markets. With the cost savings of automation, companies can afford to reshore manufacturing. One example is General Motors, which reshored 14,000 jobs following a period of digital transformation. According to a report by Machine Design, 2015 saw a 15 percent increase in industrial robot sales in North America. With robots leading the way, U.S.-based factories are competitive again.
While FARO’s specific case may not be part of this larger trend, it’s clear that manufacturing products geographically closer to U.S. consumers is on the rise.
