Manufacturers Find There's No Place Like Home

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.)

Seesmart’s 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, he’d 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 world’s manufacturer.

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 who’ve lost their jobs because of 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.