Still Chasing Cheap Labor Overseas? The Business Case for Bringing Manufacturing Home
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This article originally appeared in the April 2013 issue of Design-2-Part Magazine.
Armed with new data since he last spoke with Design-2-Part Magazine, Reshoring Initiative Founder Harry Moser makes a compelling case for manufacturing in America
It's been four years since Harry Moser jump-started the Reshoring Initiative, aiming to re-invigorate an embattled sector of the economy in the hard aftermath of the 2007-2008 financial crisis. In that time, Moser has left no stone unturned in his efforts to persuade U.S. companies of the bottom line, big picture benefits of returning their manufacturing work to America from overseas locales. Now, after countless presentations, webinars, and TV, print, and radio interviews, it appears that his message is resonating with private industry, public policy makers, and the general public.
Today, the Reshoring Initiative counts a number of high profile brands—including GE, Google, Caterpillar, Ford, Whirlpool, and NCR—among the manufacturers that have successfully reshored. "We've concluded that about 50,000 manufacturing jobs have been reshored, which is about 10% of the manufacturing job growth since January 2010," Moser said in an interview. "It's also resulted in about 100,000 total new jobs, including the multiplier effect. That's a new conclusion."
In NCR's case, the company returned production of ATMs from China, India, and Brazil to a 350,000 square foot factory in Columbus, Georgia. Reasons for the reshoring included rising wages in China, delays resulting from slow responses of contract suppliers, especially lower tiers, and the desire to "eliminate silos" by locating manufacturing near the company's engineering resources and customers.
General Electric, citing tax incentives and ease of design collaboration with local workers, reshored production of its water heater appliances to a unionized facility in Louisville, Ky., a move that created 400 jobs. When inventory and delivery problems were considered, the relative cost of producing the water heaters in China went from 30% lower than the U.S. to 6% higher, Moser said.
Moser believes that increasing the use of Total Cost of Ownership (TCO) as an analysis tool could help bring back about a quarter of the manufacturing work that has gone overseas. In a recent phone interview, he cited data from the Reshoring Initiative indicating that when price, rather than total cost, is used as the basis of cost comparison, the price of manufacturing in the U.S. is, on average, 69 percent higher than the price of manufacturing in China, and in only 15 percent of the cases is the U.S. price equal or lower than in China.
"Whereas, looking at total cost of ownership, which is the output from the calculation, on the average, the U.S. is 4 percent lower than China, and in 56 percent of the cases, the U.S. has the advantage," Moser said. "So there's a huge swing in the perception of U.S. competitiveness depending on whether you use TCO or you use ex- works price." Strikingly, in the 56 percent of cases in which U.S. companies had the total cost advantage over China, the average total cost was 32 percent lower than the total cost of manufacturing in China.
Without naming the company, Moser said that a $50 million company is relocating to a newer and larger facility in the San Francisco Bay area of California after The Corporation for Manufacturing Excellence (Manex) employed TCO analysis to show the total cost impact to the business. The analysis showed that although direct labor is significant, an array of indirect and secondary costs—including those related to warranty, travel, logistics, transportation, and third party subcontracting fees—were significant contributors to total cost. The company is relocating to a facility in the East Bay area and is planning to reduce costs with a Lean Manufacturing effort.
Moser recently participated in an Economist online debate, presenting in defense of the motion, "Do multinational corporations have a duty to maintain a strong presence in their home countries?" Arguing that it's actually in companies' self-interest to reshore, Moser prevailed by building a compelling case for reshoring as a sound business decision with bottom-line rewards.
Harry Moser spoke with D2P in February, offering his insights on the Economist debate, why companies are reshoring, and what he believes is a realistic goal for bringing manufacturing back to the United States. An edited transcript of our conversation follows.
D2P: What's the most frequent objection to reshoring that you've heard from company representatives that you've spoken to?
Harry Moser: Wage rate—the same things that drove them offshore. I'd say that's number one; the costs are lower, the price is lower. Number two, would be they want to be in the Chinese market, in the miracle of 1.3 billion people growing at 8 percent a year, as opposed to here, with a fourth as many people growing at 1 percent a year.
Those are the reasons they went offshore. If they just invested a hundred million in a new factory, there's no way they're going to admit that that was a mistake and they're coming back.
Those are the things they admit. What they don't admit is, in many cases, the supply chain manager or the corporate executives have their bonuses based on something like purchase price variance. [Taking on the voice of an offshoring executive] "We were buying them (parts or components) for $100, and now we're buying them for $60. That's $40 savings, and, times a thousand, that's $40,000 a year of purchase price variance. And I've got to get a $100,000 bonus, or a million, this year." It's easy to justify a bonus based on that, even if they really didn't save any money when they look at the total cost. Whereas it's hard to get a bonus for not changing anything, and it's hard work to use Lean or automation or training or motivation to get your costs down by 10 or 20 percent domestically and justify a bonus. So it's much easier just to order the stuff—the bearings or whatever parts they may be—cheap from somebody offshore, and look like a hero. They don't mention that, but that's behind a lot of the decisions not to reshore.
D2P: How is the TCO EstimatorTM Tool being received by companies now? Are they finding it to be a useful tool for cost analyses?
HM: We've had about 600 people use it. I only know of one that uses it, like, weekly or daily. We have an article about one company, Hubbardton Forge, which makes high-end lighting, like fancy dining room lights, and they use it routinely. Their supply chain manager, who's been been on panels with me, and webinars, and things like that, says "It's just part of our life now; we just go ahead and do it."
We made it so easy to use that people don't have to call me. We made it so that they just use it. I'm sure some of them just go in and use it once and say, "Well, OK," and others are in there using it moderately often, or maybe they say, "Huh, for this category, it looks like you've got to add 30 percent on to the Chinese price to make it balance, to come up with total cost. And maybe they do it once or twice, they come up with a parameter like that, and they don't have to go back in again [to use the estimator] for a while.
D2P: There are obviously some very well established reasons to bring manufacturing back—everything from higher quality to shorter delivery times and rising costs. What reason would you say has most resonated with manufacturing companies recently, say, in the last year or so?
HM: They're typically solid economic reasons, and they're related often to delivery, to freight, to costs going up offshore. Those are the kinds of real hard economic numbers that are more often mentioned than the softer [reasons]. Political instability comes up fairly often, as does intellectual property, but the softer things don't get mentioned. The hard economic, "you can count them in the spreadsheet" kind of things are what gets mentioned.
D2P: So it sounds like companies are now making more of a business case to reshore.
HM: A lot of the articles mention that companies say, "We're not saving what we thought we were going to, because there were a lot of costs that we didn't allow for." You'll find study after study and survey after survey that come up with quotes like that. So I believe they're starting to do the math better, starting to do their homework better, and make better decisions.
D2P: You recently made the case, in The Economist's online debate on reshoring, that multinational corporations also have a duty to maintain a strong presence in their country of origin. And you described a strong presence as including "investing, employing, manufacturing, and sourcing at least in proportion to their sales in the origin country." One of the sources of this duty, you argued, is the understanding that a strong presence is almost always in the interest of the company's shareholders. That sounds like a pretty interesting new argument.
HM: So if you look at the motion, I think they expected me to argue [that companies have a duty to maintain a strong presence in their country of origin] on the basis of just ethical and moral reasons, philosophical duty, and nurture—you know, you have that duty because you were nurtured here. And I did make those arguments. I quoted people more knowledgeable than I about how a company does have a cultural, ethical responsibility to maintain a strong presence here, and I defined it, as you said, as proportional to their sales here. If you're getting half your profits here, half your sales here, half your whatever, then you ought to be doing half your employment and manufacturing here.
Then I made the case that you're either going to agree with me or not; I can't change your mind. If you don't agree with that basic philosophical reasoning, then listen to this reason: Companies typically will be more profitable for their shareholders if they bring some of it back and keep that strong presence for the shareholders. Everybody knows that's a major responsibility.
And then I said that even if you've paid a high return to your shareholders, look at what happens if you don't maintain a strong presence in your country. If unemployment gets so bad and the U.S. loses its defense and the society collapses, well, your shareholders may have good dividends, but they're going to be living in a horrible country, and therefore you've hurt them. So think about not just the dividends you give to them, but also maintaining the society in which they live, given that 80 percent of U.S. companies' shareholders live in the United States. Think about the whole package of how you treat them. It's a combination of "It's in the shareholders' interest in terms of dividends," and "It's in the shareholders' interest in terms of the society." The company can only survive if the country is viable, if our legal system survives, if the Defense department has some strength. If you undercut the country too much, all those things will go away and your company will be destroyed or taken over. Therefore, in the long term, to maintain stability for your country, and therefore for the company, give at least some thought to it.
Now. we don't say you should lose hundreds of millions of dollars by buying here when your competitors are buying it offshore, but at least, if things are close, give the U.S. the nod.
D2P: In the last year or so, some big names, like GE and Caterpillar, have decided to reshore, and more recently, Apple has said that it will move some of its manufacturing to the United States. Why do you believe these companies have decided to come back?
HM: I'd say Caterpillar is the simplest to explain. They seem to have a very clear philosophy—produce most things near where they're going to be consumed. They produce in China for the Chinese; they produce in America for America, for North America, and they also export some of their products. Some products you only want to make in one place because the volume isn't so big, and the model is universally useable. But basically, they're the simplest case. They're doing it because that's their philosophy—it makes sense to make things near the consumer, and that's exactly our philosophy. So we're in total agreement.
GE brought it back because of two overriding factors. One, they found out that by having the engineers and the workers and the foremen get together and redesign the product, they were able to dramatically cut the cost such that the product made in the U.S. sells for 20 percent less than it did when it was made in China. So it helped innovation. You can innovate better when you have manufacturing in the same building as engineering, or close enough—in the same town or the same state—that you can get the people together.
Second, when everything was done, the Chinese ex-works price was still 30 percent below the U.S., but when they looked at total cost, the U.S. total cost was 6 percent below the Chinese. So it was a combination of the impact on innovation—reducing the U.S. cost—and looking at total cost. Those two things, I'd say, were the two motivators there.
Apple is a more complicated case. There are lots of quotes that have come out over the last year. Jobs used to say the U.S. lacks the ecosystem to produce their product. It does not have the people to make all the subcomponents, do all the processing, and therefore, it would be very difficult to do here. Because if you're going to just import all the pieces, then the economics don't make so much sense.
And then later, Tim Cook was being interviewed in an auditorium in California, and somebody asked him, "Why don't you make the iPhones here?" And he said, "We're thinking about it." But one reason not to make them here, he said, was that in the U.S.—and I'm paraphrasing—he couldn't fill that auditorium with tool makers. We don't have enough toolmakers, he said, and that's true. But in China, he could fill cities with tool makers. Now, are they as good as ours? No, but sometimes, you just need a lot of them, and a lot of them means you can throw them at a project and get it done fast. Whereas here, we don't have enough, so deliveries are long.
So why did they bring it back? First, they've got so much money [laughs], and second, some people have suggested it's a political action. I think it may be a little bit political, but more so, it's a customer relations action. I'll bet GE has spent $100 million advertising their Appliance Park reshoring, and now, Apple is announcing that it's going to do its Mac reshoring. In each case, they get credibility with the customer because the customer increasingly prefers to buy an American made product and will give them some credibility for it.
So is there any difference between announcing that "We're going to make things in the U.S., and that should please you, the customer," as opposed to saying "We're going to donate a million dollars to the Red Cross," or something like that? Those are good PR things that help your image with the customer. If that causes the customer to buy more things, that's how business is. So I think it's just plain good business for them, for all of these companies, to have done it because it strengthens their image with their customer and, in some cases, with the government—and that might influence decisions.
D2P: Maybe it's because GE and Caterpillar are such high profile names, but some of the reasons for reshoring that you just mentioned—the need to locate manufacturing closer to their design and engineering facilities and closer to their customer base—seem to be catching on with American manufacturers.
HM: Yes, and we've promoted the heck out of them. But in every case that comes up where the company says that's what they did, it reinforces it to everybody else.
D2P: What would you say is a realistic goal for bringing manufacturing back?
HM: Offshoring took 50 or 60 years to get here, from when Japan started it after the war, say, in the 1950s. It's taken 50 or 60 years to get to where we are now, and it's going to take 20 or 30 years, probably, to turn it around. My objective is to balance the trade deficit, which would bring back about 3 million manufacturing jobs—maybe 7, 8, 9 million total jobs—and significantly balance the budget deficit. Unemployment would come down, and things would be better. So that's my goal. Will I live long enough to get there? Maybe not. But I think it would be wonderful to have a million jobs—manufacturing jobs—back in 10 years. It would be wonderful, but it's going to take the kind of thing where the Chinese have to keep their wages going up, and U.S. companies have to continue to be more efficient, more lean, and more automated, with more and better training. It would help if we got the Chinese to raise their currency; that alone would help dramatically.
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