Anecdotes and some Data Say Yes – Even as Trade Deficits with China Rise; US Now has Total Cost Advantage in Some Areas, GE Executive Says
It remains mostly anecdotal, but a growing number of major US companies seem to be repatriating some work sent offshore in recent years back to America.
Enough to signal a real trend? That is unclear at best. But rising labor costs in China, threats to intellectual property, concern about the future value of the US currency, a desire for greater supply chain flexibility and other factors do seem to mean more than a few manufacturers are rethinking global production strategies.
Earlier this month, Ford Motors said it was planning to bring back to the US the work and some 2200 jobs by 2012 for parts production that had been offshored to Mexico and other countries in recent years. The move was part of a promise made to the United Auto Workers in 2007 related to a new contract that slashed entry-level labor costs and changed work rules to make factory decisions more flexible. However, Ford has said that as it must first recall formerly laid off workers to fill the jobs, most of the new spots are actually at the higher end wages still made by long-time union workers.
Even at the higher wage rate of older workers, bringing the work back into the plants makes sense, Ford spokesperson Marcey Evans said.
“It’s all based on the long-term business case,” she said.
GE in 2009 announced it was repatriating production of a new line of “smart” energy efficient water heaters back to Louisville, KY, and with it 400 plus jobs. Again, changing labor costs were a factor, with a contract offering new employees just $13 an hour versus the $22 per hour that had been the standard. A variety of government financial incentives were also involved. But GE is making big investments in its “Appliance Park” in Louisville, and the city is thrilled to have the jobs back.
“This is the beginning of a new era at Appliance Park,” Mayor Jerry Abramson said at the time. “Not only does this announcement bring new green jobs to our city, its sets the stage for GE to grow and expand even further. GE’s decision to bring this new product to Louisville is a testament to the generations of Louisvillians who have worked at Appliance Park.”
“I think we’re going to start to see a slowing of lost jobs, and we’ll see some jobs coming back,” says Simon Ellis, an analyst for IDC Manufacturing Insights, recently told USA Today. “At some point, it will balance out, and we’ll reach an equilibrium.”
The story is a little different for every company bringing work or suppliers back to the US, or beginning to think about doing so. But a growing theme seems to be the recognition that the total benefits of lower offshore per unit costs are too often frittered away in other hard and soft costs involved in doing business offshore – especially as costs in China continue to rise.
George Stalk, a consultant at Boston Consulting Group, has led research efforts showing the inventory benefits for high margin, fashion-oriented goods from bringing production at least back to North America almost always trump the value of lower manufacturing costs in Asia. Those benefits come from both not losing sales from being out of stock and not getting stuck with obsolete inventory that a company can’t sell or must mark down dramatically.
“A lot of companies who have gone there to take advantage of cheap labor are starting to tell us that if you (calculate) total cost and don’t just look at wages, it’s actually not worth it,” Jeremy Leonard, consultant for Manufacturers Alliance/MAPI, said recently.
Wages in China continue to rise, as recent labor strife and significant increases in minimum wage rates and factory labor wages are driving up the cost of making things there. Other lower cost Asian countries are certainly one option, and many apparel companies have started to move production to Vietnam, Cambodia and other countries, but that may not be so easy for other types of manufacturers.
Western companies are also increasingly worried about protection of their brands and intellectual property rights in China. A recent lawsuit by Motorola charging the active participation of a large Chinese manufacturing in a nearly decades-long theft of its IP for cell phones and network equipment brought the issue to national attention in the US.
Trade Numbers Tell a Different Tale
Of course, the anecdotes about Ford, GE and others must be put in the context of the actual trade numbers, which continues to show growing US deficits, especially vis-à-vis China.
The US. trade deficit surged in June to the highest level since October 2008 as imports of foreign consumer goods hit an all-time high. In June, the US trade deficit with China rose 17.4% to $26.2 billion, and is 15.9% higher through the first six months of 2010 than it was during the same period in 2009.
However, MFG.com released a survey in June that found that 21% of North American manufacturers said they’d brought production into, or closer to, the continent in the past three months, up from 12% in the first quarter; 38% planned to research such a move in the next three months, the study also found. Those numbers, however, include bringing production back from say Asia to Mexico or South America, not necessarily the US itself.
Supply chain speed and integration, especially for new, high tech or complicated products, is also a key factor.
Both intellectual property and supply chain responsiveness, for example, were factors for GE’s decision to re-invest in Louisville. Its new water heaters are expected to be high growth products.
“We don’t want to just park that [technology] with another company to build,” said Jim Campbell, CEO of GE’s appliance unit, recently noted. “When you have it in your plant, the cycle time is faster, and you can do launches quicker.”
Campbell adds that GE plans to make other advanced products in the US, saying that what was not long ago a 30% Chinese cost advantage likely has changed to a 6% total cost advantage for the US when considering lower inventory expenses, quality, and the smooth flow of goods.
With these changes in supply chain thinking – and the lower labor rates it was able to negotiate, “The biggest difference is the US is in the game now,” Campbell adds.
A smaller company, U.S. Block Windows Inc., came to a similar decision last year. After having outsourced production of some of its molding work to China, last year the company moved the production back to its main manufacturing facility in Pensacola, Fl.
“When we started looking at the costs and complexities of the inventory and lead times, there really wasn’t any savings,” said Block Windows’ president, Roger Murphy.
Indeed, the pattern seems to be that those announcing onshoring moves are makers of arge, complex products. In addition to GE and Ford, for example, construction equipment maker Caterpillar and ATM and retail POS and kiosk maker NCR are among other companies to say they are repatriating production to US soil.
Caterpillar, notably, just announced it is consolidating its global production of excavators in Victoria, TX at a new 600,000 square foot facility that will employ at least 500 workers. Some of those jobs are coming at the expense of similar work in Illinois, however – as many manufacturers find the business and union climate to be more favorable in the Southern regions of the US rather the than traditional manufacturing centers in the Northeast and Midwest.
The Victoria plant is Caterpillar’s second major recent investment in Texas, as earlier this year the company moved its engine-manufacturing operations to a new plant near San Antonio, also taking away from some work being done in Illinois.
But other types of companies are also seeing benefits from onshoring. The USA Today recently reported that Diagnostic Devices, which makes blood-glucose testing strips and monitors for diabetics, is moving much of its production to Charlotte, NC from China and Taiwan. The big driver – high inventory levels with offshoring.
The company says that given lead time and delivery challenges from Asian-made goods, it has to keep a total $6.5 million in inventory compared with an estimate of just $1 million if its products are made in the US.
The new production facility in Charlotte will be highly automated, however, to minimize the impact of the labor cost differential.
“We analyzed every angle of our overseas manufacturing and devised a means to bring jobs back to the US, while remaining competitive and even cutting costs by a projected 40 percent,” says Diagnostic Devices COO Rick Admani Abulhaj. “The answer to the dilemma is the implementation of cutting-edge automation and robotics technologies that deliver an enhanced bottom-line effect and give us greater control of our operations and our intellectual property.”
Do you believe we will see more production returning to the US? Or do the trade deficits continue to tell the real story? Will it take falling hourly wages in the US to make the move economical? Are we calculating the true costs from Asia right?