Why Manufacturing in the U.S. Makes Sense
Experts explain the reasons for thinking global and manufacturing local.
|Watch the Reshoring Q&A video below!|
Companies that have announced plans to bring production back to the United States—such as Apple, Motorola, Lenovo, and GE—do so for a variety of reasons, but the idea is to manufacture products closer to the end customer. If the market is in North America, China may not be the best location.
GE found this out firsthand. Some products were best made closer to the U.S. market. The first product to be manufactured in the U.S. again was the GeoSpring water heater, part of a larger change involving lean, new product design and cost saving features.
“It just made sense to bring the product closer to the customer,” says Steve Downer, GE general manager for water products. Bringing production back from China allowed GE to shorten response time as well as simplify and enhance the design.
But of course, picking up production does create challenges, especially when you are changing three things at once, Downer says. They were adopting lean, creating a new design for the water heater itself, and manufacturing in a new factory.
There were larger challenges to manufacturing this product in China, however. “You’re very removed from the actual manufacturing process and I think that limits your ability to innovate and evolve as you might be able to do when you’re really close to it,” Downer says. “Now we have more eyes on it. We are bringing customers into the factory now. More people can look at something and make a suggestion, and it’s allowed us to improve more quickly. We’re all back in that plant daily.”
And what’s true in real estate may also hold true for manufacturing: location, location, location. By manufacturing in Kentucky, Downer now sits 50 feet from the factory entrance instead of an ocean away. Being closer to the factory floor, coupled with lean, has lead to innovations such as a 20% part count reduction. “That’s the kind of numbers that enables us through lean to do this in the U.S.,” Downer says.
Making It Here
And GE isn’t alone is seeing U.S. production improve the manufacturing process.
As companies aim to get closer to their customers, they have developed an ongoing interest in reshoring, or bringing production back to the United States (also referred to as onshoring or insourcing). Though reshoring may only make up a small fraction of manufacturing jobs, it is still an idea garnering interest.
Motorola has decided to manufacture a new phone in Fort Worth. Apple and Lenovo have also publicized their plans for U.S. production. And Walmart has announced plans to buy $50 billion more in products made, sourced or grown in the U.S. over the next 10 years.
As Charles Fishman wrote in The Atlantic last year: “In fact, insourcing solves a whole bundle of problems—it simplifies transportation; it gives people confidence in the competitive security of their ideas; it lets companies manage costs with real transparency and close to home; it means a company can be as nimble as it wants to be, because the Pacific Ocean isn’t standing in the way of getting the right product to the right customer.”
Still, the transition can be challenging, as Frank Russo, CEO and co-founder of Fabricating.com (Hoboken, NJ), points out: “If you’ve sunk half a million dollars in tooling in China or India, it’s difficult to take that and move it.” But he has heard a similar scenario multiple times: An offshore supplier started out great. High-quality parts were delivered on-time. But then, slowly, problems creep in and suppliers miss delivery dates. And fixing these issues may be more difficult if there is an ocean in the way.
While major reasons for reshoring continue to be economic: wages going up offshore, along with shipping and quality costs, it can also be a marketing decision, as U.S. customers often prefer a U.S.-made product.
Regardless of the reasons, reshoring is happening, Russo says. “We see it here every day,” he says. “I can’t argue the depth of it, the amount of it, and whether it’s a sustained movement or a trend, but I can tell you that I see it every day.”
See If Manufacturing Here Makes Sense
According to A.T. Kearney’s 2013 Foreign Direct investment Confidence Index, one-quarter of investors surveyed said they plan to leave China in the next three years. But only 6% of those say they would return to the developed world. Patrick Van den Bossche, A.T. Kearney’s lead partner for the Americas, strategic operations practice, says, “China had a labor cost advantage for about 30 years and they still do, but now, there have been some changes. There are large pockets of China where manufacturing has become more expensive.”
Van den Bossche explains that two-thirds of current reshoring activity involves upgrades to existing facilities, with the remaining one-third in new facilities. “Companies are filling up empty buildings they vacated when they moved offshore instead of adding new buildings. It’s less capital-intensive than plunking down steel for a new plant.” He notes that this could be a sign that companies are not convinced of the long-term prospects for manufacturing here.
Though he is optimistic about manufacturing overall, Van den Bossche says that the skilled workforce gap is his biggest concern. Most of the plants he visits with clients have open positions, but they can’t find engineers to fill them as it is. And if a surge of manufacturing jobs returns to the U.S., he wonders how those new positions would be filled.
The opportunity for new jobs is there, according to a Boston Consulting Group study released this August. The study found that the United States could gain between 2.5 and five million manufacturing jobs in the next seven years.
In addition, manufacturing employment numbers are up from a year ago, according to August workforce statistics from NIST. These numbers can be explained by a number of factors, according to Kenneth P. Voytek, chief economist at NIST Manufacturing Extension Partnership. “I think [reshoring] is a positive trend,” Voytek says. “Has it really moved the macro picture for manufacturing? At this point I don’t see it showing up in the numbers. Its impact, at this point, is positive in the cases where it’s occurred. It’s not changing fundamentally the overall picture of manufacturing at this point. The positive thing out of reshoring is the raising of awareness that there are these costs of doing business that don’t necessarily show up immediately in the bottom line.”
Whether or not manufacturing in the United States shifts the balance of American manufacturing, making products closer to customers makes sense for a lot of companies. “We could have called it the localization initiative,” says Harry Moser, founder and president of the Reshoring Initiative (Kildeer, IL). “The idea is to build near the customer, whether that’s in Brazil, the U.S. or China.”
And there is support for this idea. In an online debate for The Economist this year (available at www.economist.com/debate/overview/245), Moser argued in favor of reshoring and ended the debate with 54% of voters in agreement.
“The biggest change is incorporating the customer and supply chain into the whole value stream of what’s going on,” says Paul G. Kuchuris, Jr., president, Association for Manufacturing Excellence (Rolling Meadows, IL). “When the customer involved in the process, it’s a direct link into achieving the expectation of what you’re looking for. When you bring your supply chain in to more of a continuous improvement, efficient mentality, the quality of supplier products is better, and more than likely the cost is more controlled.”
Consider Total Costs
With the increased attention on reshoring, Douglas K. Woods, president, the Association for Manufacturing Technology (McLean, VA), says people are now much more aware of total costs. “The numbers are hitting them because of the time to market, supply chain, and energy to ship things. It’s more brutally obvious to them as they focus on getting every drop of efficiency out of their operation.”
According to the Reshoring Initiative’s estimates from user data, 25% of manufacturing should come back to the U.S. if companies considered total costs instead of just price. But even once the data is analyzed, change might happen slowly.
“It’s a gradual trend because modifying your global supply chain and modifying your supplier network is not something that can be done overnight,” says John Ferreira, managing director at Accenture (New York). In addition, it requires a close look at customer requirements in each segment of the business and comparing the total cost model against those requirements, Ferreira says: “Otherwise you’re just shooting in the dark. You’re guessing.”
The Macroeconomics of Manufacturing
Still, it’s important to consider the larger picture with reshoring, says Robert E. Scott, director of trade and manufacturing policy research at the Economic Policy Institute (Washington, D.C.).
“We’ve lost two million manufacturing jobs in the depths of the recession and added about half a million since. The growth of the domestic economy entirely explains the growth in manufacturing output,” Scott says. “You see people talk about new plants going in, like Airbus in Alabama or Volkswagen in Tennessee, but they don’t have the ability to step back and look at the forest, not just the trees.”
In addition, he points out that broader change depends on currency manipulation and larger global factors.
If reshoring is not the magic cure-all for manufacturing, it is also not the only way to strengthen American manufacturing. Scott says that the U.S. should be much more aggressive in investing in R&D and creating a competitive environment in manufacturing. “We play that game with both hands tied behind our back,” Scott says. “Other countries are much more aggressive. We’re slashing R&D …We’re eating our seed corn.”
But he notes that we are doing some things right, with bright spots such as NIST’s Manufacturing Extension Partnership, a program run by the Commerce Department, that continues to help the economy grow. According to the organization, with every $2,100 invested in it, MEP creates or retains one manufacturing job.
So, as new plants crop up and some manufacturing returns from a stay abroad, there are opportunities for American manufacturing. Though some manufacturing will not return to the U.S., for some companies, it does make sense to make more of their products here.
Read: "How to Make It in America" from April 2012.