Wednesday, December 5, 2012

The New Manufacturing Destination: Americas

imageThe pendulum on far-shoring for manufacturing may have just swung back. Many factors including higher gas prices, rising labor costs in China, shrinking product life-cycles, innovation premium, environmental-awareness, social branding needs and even political environment have contributed over the last few years to reverse a trend that seemed irreversible. Smaller, nimble, pioneering companies started the reverse trend during the last few years and it may finally become a tide with the likes of GEs joining the fray.


  • Neutex, an LED lighting company, brought back its production from Shenzhen, China, to Houston, saying it will be cheaper to manufacture in Houston.
  • Master Lock in Milwaukee, Wis., sent as many as 1,000 jobs overseas in the 1990s and just brought back the first 100.
  • Nat Labs is doing the same, it’s now making dental molds in Florida instead of China and hopes to hire 300 people.
  • In Detroit, GalaxE.Solutions, a custom software development company, decided to move back, taking over an office building that had been vacant for nearly a decade.
  • Shoemaker Annie Mohaupt nearly closed down a year ago after her move to make sandals in China proved a bust. The sandals could easily be pulled apart. She looked into what it would cost to make her sandals in another country but returned production to Chicago. The decision, she said, allows her to tap into growing demand for U.S.-made products and to utilize manufacturing technology that makes her company, Mohop Inc., a global competitor.
  • Whirlpool Corporation brought back production of their KitchenAid hand mixers to Greenville, which for the previous six years had been made by a contractor in Huizhou, China, near Guangzhou.
  • Otis Elevator is shifting some of its production from Mexico to South Carolina.
  • On February 10, GE reopened one of its factories at their famed Appliance Park in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. The water heaters it began making had previously been made for GE in a Chinese contract factory. Just 39 days later, Appliance Park opened a second new assembly line to make new high-tech French-door refrigerators. These have been made in Mexico for years.

Wall Street journal says, “A survey of 105 companies in January and February by David Simchi-Levi, an engineering professor and supply-chain expert at the Massachusetts Institute of Technology, found that 39% were considering moving some manufacturing back to the U.S.”

More and more companies are reevaluating the economics of off-shoring and are unable to find the cost savings which may have justified the moves years ago. The fact is, it is not the same world any more! Consider the following:

  • Fuel: The cost of gas has quadrupled from 1994 to 2012. (See data from US Energy Information Administration). 
  • Labor costs: The wages in China have been rising. A report from TD Economics says, “At the turn of the century, average Chinese manufacturing wages were roughly one-fortieth of their American counterparts.  Since then, wage inflation in China averaged 12.8%, or more than triple the pace in the United States. ……all-in wages in coastal areas of China specializing in computers & electronics and transportation equipment production may approach one-quarter of wages in southern U.S. by 2015.”
  • Shrinking product life-cycles: Product life-cycles have been shrinking, which means that companies have to design and introduce new products at a faster rate forcing manufacturing operations to adapt to much faster ramp-up time to learn and establish the new manufacturing, assembly, and quality assurance processes. Charles Fishman, in his article The Insourcing Boom writes, “Just a few years ago, the design of a new range or refrigerator was assumed to last seven years. Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years.” Manufacturing products in factories physically closer to the designers and engineers obviously makes it easier to introduce newer, more innovative products faster.
  • Innovation premium: Last few years of off-shoring has “commoditized” a whole lot of products. These products have moved from “wants” to “needs”. To stay profitable, companies must continuously innovate to get the premium prices. This obviously introduces the intellectual property risks, but more importantly risks key management and business practices that make a company competitive. Leo Hindery Jr. puts it succinctly in his blog, “we have finally come to appreciate that American corporations committed to offshoring have almost universally been providing their foreign suppliers and overseas subsidiaries with massive amounts of business knowledge, management practices, training and other intangible exports………This massive transfer of intellectual property is what will ultimately be the biggest drain on our economy”.     
  • Social branding needs: In the world with Facebook and Twitter, companies are always exposed and their brand is continuously under scrutiny from their most loyal customers. And companies can do well without the kind of publicity Apple recently got when there were riots at Foxconn’s factories, Apple’s largest supplier in China.    
  • Environmental awareness: The off-shoring trends of the recent years in the developed countries have shifted most of world’s manufacturing activities to developing regions where the environmental regulations seldom exist or enforced. However, the customers in the developed countries with their growing environmental awareness often demand that companies do business with suppliers that are environmentally responsible. This is easier said than done when majority of the suppliers are half a world away. Legislation like California Global Warming Solutions Act and California Transparency in Supply Chains Act also create an environment where companies continuously find themselves responsible for their supply chains. This trend also steers companies towards shorter supply chains that are easier to manage and control.

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© Vivek Sehgal, 2012, All Rights Reserved.

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