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Sherri Cruz

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Manufacturers Find There's No Place Like Home

Sherri Cruz, Business Journalist 9/9/2011 17 comments
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General Electric Co. (NYSE: GE) is doing it. So is Caterpillar Inc. (NYSE: CAT), a maker of bulldozers and other construction equipment. Both firms are insourcing or reshoring -- shifting production from overseas to the US.

Some other companies that are reshoring: the LED light maker Seesmart Inc., the furniture maker Sauder Woodworking Co., the ATM and cash kiosk maker NCR Corp. (NYSE: NCR), the online data storage company Carbonite Inc. (Nasdaq: CARB), Master Lock Company LLC, and Wham-O, the maker of Frisbee Discs and other toys. Reshoring is catching on because it makes business sense. By 2014, GE expects to create 500 US jobs by opening four refrigeration design and manufacturing facilities. This is a new product development model for us, said Kevin Nolan, a vice president of technology at GE. For years, products have been designed far away from the factory and the people who would manufacture them. By co-locating all the people who are involved in bringing a product to life -- engineering, quality, production (hourly and salaried workers), and sourcing -- we increase collaboration and problem solving and shorten development time. The result is going to be better products for our customers. (Of course, GE also announced this summer that it's moving its global X-ray headquarters from Waukesha, Wis., to Beijing, thereby taking about 125 jobs out of the US. But let's stay focused.) Seesmarts chief executive, Ken Ames, said that when his company looked at its expenses, it didn't find much difference between operating in China and operating in the US. And all things being (almost) equal, Ames said, hed rather operate in the US. American companies began moving production to low-wage countries en masse about 15 years ago to stay competitive as the demand for cheap goods climbed. Six million manufacturing jobs were lost between 1997 and 2009 due to offshoring and automation. (See The Fragile Hope of a Manufacturing Renaissance.) The jobs mostly went to China, which has made it its business to become the worlds manufacturer.

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But as labor costs rise in China (where demand for skilled workers outstrips supply) while shrinking in the US (where supply outstrips demand), producing overseas becomes less attractive. A May report from the Boston Consulting Group, "Made in America, Again -- Why Manufacturing Will Return to the US," reveals that "China's overwhelming manufacturing cost advantage over the US" is evaporating. According to a press release on the report: With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states -- including Mississippi, South Carolina, and Alabama -increasingly competitive as low-cost bases for supplying the U.S. market. The potential for cost reduction alone is no longer enough to justify moving operations, according to the sixth annual study of corporations' offshoring trends by the Center for International Business Education and Research's Offshoring Research Network at Duke University's Fuqua School of Business and The Conference Board, an independent research association. The study, part of ongoing research into the effects of offshoring trends on American competitiveness, reflects the sentiments of business managers. "One survey respondent noted it has taken his company several years to discover the impact of labor arbitrage disappears in fewer than three years," Ton Heijmen, senior adviser to The Conference Board, said in a press release. "Companies are now shifting from cost-driven offshoring to a multidimensional value proposition in creating a global footprint." As companies expand offshoring activities by increasing scale or moving more diverse and complex functions, most firms see a decline in overall efficiency. This may be partially attributed to a loss of managerial control as offshoring operations are expanded, requiring companies to improve the coordination and management of their global sourcing. And then there's the whole concept of quality control. Mark Krywko, CEO of the high-end earphone maker Sleek Audio, discovered that it's easier to control the quality of your product close to home. Last year, Krywko and his son Jason, Sleek Audio's COO, decided to relocate the factory that assembled its top-of-the-line products from Dongguan, China, to Manatee County, Fla. It's a small operation -- the father and son expect to employ about 15 when the factory starts up in central Florida next month. But it's a start, Mark Krywko told IU today. "And it will grow as we grow." At a minimum, it will relieve what he describes as the unbelievable headaches that come from manufacturing high-end products half a world away. "You have no control," he said. "When you're there, everything is fine. Everyone does what you ask. But as soon as you walk away, you get cheaper plastic, less quality." Since word spread that Sleek Audio was bringing some of its manufacturing home, "it's been crazy," Krywko said. "We've been inundated with thank you notes and email. And the funny thing is that even the Chinese people are excited, because they want to buy products that are made in America." Though the cost differential is shrinking, Krywko concedes it's still cheaper to make some things abroad, including certain cables and components. "We can't bring everything back." Not yet, anyway. Proponents of reshoring say policymakers could encourage renewed domestic production. US manufacturers already make about 75% of the products Americans consume, but they could boost that figure up to 95%, according to a recent Booz & Co. report. Simplifying and streamlining tax and regulatory structures and promoting manufacturing careers are just some of the things that would boost manufacturing, the report says. But Harry Moser, retired president of the US subsidiary of the Swiss machine tool maker GF AgieCharmilles, who now heads the Reshoring Initiative, advises companies not to wait for policy changes. Instead, he says, more companies should simply examine the total costs -- not just labor costs -- of doing business overseas. The factors include energy prices (which increase shipping rates), freight, packaging, travel, the costs of keeping inventory (carrying costs), natural disasters (which disrupt supply chains), and the theft of intellectual property. Moser contends that reshoring could help balance the $600 billion trade deficit and reduce the unemployment rate. Still, reshoring proponents have a lot of work to do, because many more companies are offshoring than reshoring. A report by the Associated Press found more companies than ever are moving jobs to other countries. As evidence, the report cites the rising number of applications for federal Trade Adjustment Assistance, a benefit for factory workers whove lost their jobs because of offshoring.

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offshoring. Times are changing, and US companies will have to reassess the business case for manufacturing in America -- and take a fresh look at the merits of staying close to home.
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Re: interesting chart Dex 9/13/2011 10:17:17 AM Well, it is from the federal government, And you know we can trust the feds.
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Re: interesting chart PredictableChaos 9/12/2011 10:56:19 PM Here's the pie chart Sherri refers to.
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Somehow, it doesn't feel right - imports only account for 14%? Really?

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1045.17 +10.88 (+1.05%) 83.79 24.73 585.78 38.18 34.66 65.93 48.81 59.93 42.50 13.16 14.47 50.21 4.84 28.04 24.21 29.84 50.85 14.24 673.50 56.77 36.83 27.93 28.58 33.26 31.62 +1.62 (+1.97%) +0.62 (+2.57%) +11.65 (+2.03%) -0.76 (-1.95%) +0.38 (+1.11%) -0.23 (-0.35%) -0.17 (-0.35%) -0.57 (-0.94%) +0.23 (+0.54%) +0.30 (+2.33%) +0.52 (+3.73%) -0.08 (-0.16%) +0.01 (+0.21%) -0.17 (-0.60%) -0.66 (-2.65%) -0.18 (-0.60%) +0.57 (+1.13%) +0.13 (+0.92%) +14.09 (+2.14%) +0.27 (+0.48%) -0.02 (-0.05%) +0.55 (+2.01%) +0.18 (+0.63%) -0.02 (-0.06%) +0.61 (+1.97%)

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Re: reshoring Value Hiker 9/11/2011 10:30:45 PM

First Solar, Inc. Gilead Sciences, Inc. GT Advanced Tech Johnson Controls, Inc. Marathon Oil Corp. Microsoft Corp

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I seriously doubt Mr. Immelt' capability as GE leader when he broke GE's long history of increasing dividend payout. In early 2009, first he promised investors that GE has no liquid issue and dividend payout will not be changed, then a week later he slashed the dividend more than 60 percent. Either he was ignorant or a pure liar.
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reshoring AskAsa 9/10/2011 4:05:34 PM From the article:

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Newmont Mining Corp. Omnivision Technologies, Inc. Priceline.com, Inc. Qualcomm, Inc. Sandisk Corp Southwestern Energy Co. Suncor Energy, Inc. Veeco Instruments, Inc.

(Of course, GE also announced this summer that it's moving its global X-ray headquarters from Waukesha, Wis., to Beijing, thereby taking about 125 jobs out of the US. But let's stay focused.) We should stay focused on the fact that White House sychophant Jeff Immelt often speaks with forked tongue. Compare his time at the GE Helm to Jack Welch who knew how to run a company. Immelt and his little TV buddy Jeff Zucker are the Fat Man and Little Boy of modern corporate culture. Both managed to destroy everything they touched. I'll believe those 500 new jobs when I see them.

VistaPrint NV

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Re: interesting chart yalanand 9/10/2011 4:12:13 AM

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@Sherri is this trend just limited to manufacturing? What about IT outsourcing ? Do we see reshoring trending in Information Technology as well ?
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Re : Manufacturers Find There's No Place Like Home yalanand 9/10/2011 4:10:23 AM

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"China's overwhelming manufacturing cost advantage over the US" is evaporating.

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@Sherri, just wondering if this is the end of emerging market boom. Reshoring will definitely impact the growth of China which is considered as the manufacturing hub.
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Re: interesting chart Sherri Cruz 9/9/2011 6:41:11 PM

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RE: "US manufacturers already make about 75% of the products Americans consume." This pie chart (at the bottom of the page) shows an even higher percent, 81.9%, while China accounts for 2.7% and other countries, 6.1%.

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Re: interesting chart PredictableChaos 9/9/2011 6:31:10 PM @mInvestor USER RANK PLATINUM

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1. In the example, productivity is measured as a fraction of US productivity. This is just how it's defined for comparison. 2. Labor is only one component of the cost of the product, so any change on labor cost will have a smaller % change on the overall product. 3. Same as 2. Since labor is 1/4 of the cost of the product, a 25% increase in labor causes a 6% increase in the product price.
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The big trend Value Hiker 9/9/2011 5:30:48 PM

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There is another big trend few investors notices: The working age population of China will reach its peak next year. China will see the shrinkage of worker supply. The higher wage is just the start of the trend. Shrinkage in worker supply can also mean the burst of real estate bubble, domestic consumer spending crash, etc. The Chinese government does have huge hoard of cash reserve to handle these crisises. But it can be a repetition of what happened to Japan in late 80s.
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Re: interesting chart Noreen Seebacher 9/9/2011 5:00:15 PM You can get more detail about the chart in the Boston Consulting Group report: http://www.bcg.com/documents/file84471.pdf Lots of details.
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