Why Canada Could Miss Out on Reshoring

As labour costs in China continue to rise, outsourcing or offshoring manufacturing to that country is looking less and less appealing. In fact, Chinese labour rates have risen to the point where offshoring to China is no longer an attractive proposition for many firms.

Manufacturing labour costs are usually in the range of 15 percent or so of final product costs. While offshoring to low labour rate jurisdictions can save on labour costs, much of the cost saving can be undone by higher freight/inventory costs, the costs of poor quality, and management level costs incurred by having to coordinate production and logistics with offshore suppliers. The labour cost gap is, therefore, not as large as it seems when these additional costs are added.

In addition, in China, wage inflation of about 15 percent annually has been further eroding the cost gap. As this wage inflation increases, China will continue to lose its appeal as an offshoring option.

US firms stand to benefit the most from reshoring their operations due to a weaker US dollar. For Canadian reshoring will not be as attractive due to the appreciating Canadian dollar. The higher Canadian dollar thus hurts manufacturers in two ways: first, by making exports more costly and less attractive to foreign buyers; and, secondly, by helping to preserve China’s attractiveness as a place to offshore production.

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