Re-Shoring in United States Projected to Gain Momentum
Innovation is targeted as key factor in bringing production back to the U.S.
As wage rates in China continue to climb and companies begin realizing the indirect costs of sourcing overseas, the United States is poised to experience a manufacturing renaissance where more jobs are staying in America or being brought back, according to recent reports, senior executives from world-leading companies, and contract manufacturers.
Innovation through the pioneering of new products and processes is strengthening the U.S. manufacturing industry, and a recent survey by the Boston Consulting Group (BCG) showed that within the next five years, the United States will have some of the lowest-cost locations for manufacturing in the developed world. In another recent survey examining the re-shoring trend (conducted jointly by Reuters and an online marketplace), CEOs and economists reportedly determined that 40 percent of North American manufacturers with off-shored production are investigating bringing that work back to the U.S. within the next year.
By focusing on product life-cycle assessment and reducing costs that are carbon intensive, Atlanta-based TOTO USA, the North American division of TOTO, Ltd. in Japan, has reached a point where the company is "now able to produce products in the U.S. at a competitive position as compared to China," said William L. Strang, senior vice president of operations for TOTO USA, during a phone interview. "I'm incentivized at this point not to actually procure my products from my factories in China, but in fact to make them here domestically in the U.S."
Strang was a featured speaker at a recent conference that centered on the re-shoring trend: the Next Generation Manufacturing event, held in October at the Georgia Tech Research Institute Conference Center (GTRI). He said that by reducing the company's carbon footprint by getting parts closer to its manufacturing operations, TOTO cuts down on costs and improves profits.
The Japanese toilet maker opened a factory in Morrow, Ga., about 15 miles south of Atlanta, in the early 1990s and produces about 20,000 toilets per month at that facility. Economic headwinds in China, such as increased currency exchange rates and a discontinuation of the value-added tax rebates, have also caused the company to look towards manufacturing more in the U.S., according to Strang. "With the right amount of innovation and the right amount of capital investment for automation and the utilization of high-productivity labor here in the U.S., we can compete with the Chinese," he said. "One particular area that has a big impact is that by manufacturing in the U.S., we dramatically shorten the length of the supply chain, which allows us to more appropriately react and address the issues of supply and demand."
Bringing it Back
Within the next five years, the United States is expected to experience a "manufacturing renaissance" creating up to three million U.S. jobs, according to a recently-released study by the Boston Consulting Group (BCG), a global management consulting firm. With Chinese wages rising about 17 percent per year, the United States is poised to become a low-cost country for manufacturing among developed nations. The gap between U.S. and Chinese wages is narrowing rapidly, and flexible work rules and government incentives, such as tax breaks, are making many U.S. states--especially southern states--into low-cost bases for supplying the U.S. market.
"All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor," said Harold L. Sirkin, a BCG senior partner, in a statement. "We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you're going to see a lot more products ‘Made in the USA' in the next five years."
Sirkin added that wage rates in China will only be 10 to 15 percent cheaper than in the U.S., before inventory and shipping costs are factored. But once those costs are considered, the total cost advantage will drop to single digits or be erased entirely.
"Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs. They're increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother--and that's before taking into account the added expense, time, and complexity of logistics," Sirkin said in a statement.
Companies can take advantage of incentives from federal, state, and local governments that are aiming to bring manufacturers back to the United States through tax breaks. According to reports, companies that choose to re-shore can expect reduced pipeline and surge inventory impacts on JIT operations, improve the quality and consistency of inputs, cluster manufacturing near R&D facilities to enhance innovation, reduce IP and regulatory compliance risk, and reduce Total Cost of Ownership (TCO).
Of all the companies queried in the Reuters survey, 15 percent said they have repatriated production back to the U.S. during the past two years, Ford Motor Company and Wham-O being two of them.
Peter Dorsman is senior vice president of global operations for NCR, which recently moved production back to the U.S. from China to respond to competition and market trends. According to Dorsman, the company is going "gangbusters" with plans to begin a second production shift in July that will result in a total of 800 new jobs re-shored to Columbus, Georgia.
Headquartered in Duluth, Ga., NCR is a global technology company specializing in ATMs and self-service kiosk products for the retail, financial, travel, healthcare, food service, entertainment, gaming, and public sector industries. The company is focused on getting highly innovative products to the market faster. Although it is keeping three factories in China, India and Hungary, NCR looked at the total landed costs and decided in 2009 to re-shore its North American manufacturing to Georgia. It was hard for North American customers to get on a plane and go to China or India, and the re-shoring has improved "customer intimacy," said Erin Talbot, head of executive communications for NCR's global operations.
"One of the driving factors is we looked at labor costs, but it was not the only driving factor because if you chase labor costs around the world, you'll be moving your manufacturing plant every year. It was more about getting products to the market faster and servicing the customer," Talbot said.
Longer shipping times, decreased product quality, limited oversight, and longer supply chains were also mentioned by executives as reasons to look into re-shoring. Boston Consulting Group noted in its report that as 3D printing takes hold, mass production within the U.S. could be far cheaper than producing and shipping products from overseas.
Manufacturing executives see innovation in products and processes as more valuable to the long-term competitiveness of U.S. manufacturing than cost cutting, according to a recent GE report entitled "The Future of Manufacturing," which surveyed 360 senior executives from U.S. manufacturing firms across a range of industries. While 62 percent of respondents see cost-cutting as a boost to U.S.-based manufacturing in the near future, 90 percent identify innovation as the key to long-term success. Retaining its position as an "innovative powerhouse" can help manufacturers overcome many of the pressures they currently face, according to the study. Respondents said that the three greatest assets the U.S. manufacturing industry has over emerging markets are the high quality of products (61 percent), innovative processes (39 percent), and the production of intellectual property (37 percent).
According to a survey of 206 manufacturing executives who attended the recent Next Generation Manufacturing event in Atlanta, more than fifty percent of respondents said that innovation is one of their company's top three priorities for 2012, with a high percentage of respondents indicating they are innovating through the development of new processes that enable them to be more streamlined and profitable, specifically through the introduction of more technology. During 2008 through 2011, including the height of the recession, companies were developing new products and establishing new processes. Seventy-five percent of those surveyed indicated that their company has been developing new products during the past three years. And 87 percent have developed new processes during the past three years.
Views from the OEM Standpoint
PickPoint (www.pickpoint.com), located in Pleasanton, Calif., and a division of Maxor NPS Corp., manufactures products that organize, secure, and track medication for pharmacies. Bill Criss, manufacturing manager for PickPoint, was having quality issues with the company's intelePharmacy WCS (Will Call System) being manufactured in China. He decided last June to begin re-shoring the injection molding parts in the product to Henry Plastic Molding, Inc. in Fremont, Calif., and the power bar and brackets to California's Uniweb. The company is near-shoring the PCB assemblies to Masterwork Electronics, Inc. in Rohnert Park, Calif. which has a manufacturing facility in Mexicali, Mexico.
PickPoint sells a will call system that enhances patient management by decreasing put-away and retrieval times, reducing return-to-stock, and offering better organization and efficiency. The system, originally produced in China, was exhibiting numerous defects, including problems with the LED color system and interference issues with wireless telephone and lottery systems.
"You can't send a product that has parts with a seven percent failure rate to pharmacies," Criss said, explaining his frustration with the Chinese supplier, who, Criss said, was "unresponsive" to the company's need for changes.
Criss found local electronics and mechanical engineering designers to help redesign the will-call product. He was pleased to have been provided with a new design that has more flexibility and more utility for pharmacies, and will cost about the same as the one that was manufactured in China. After having communications issues with the Chinese supplier, Criss decided to interview a number of contract manufacturers in the Bay Area that were all ISO 9000 certified and most importantly, close by.
"They're in the same time zone, the telephones work, we can speak in English, and we can set up meetings instantly," Criss said of his domestic supplier choices. "We're also able to control our parts availability. The communication works and the design works, and if you have a problem, you can resolve it instantly."
When trying to deal with the Chinese supplier, Criss said, he couldn't even get a phone number or the necessary invitation he needed to get a visa to visit the plant.
"It was just totally bizarre. The communications were bad, the quality was bad, and they wouldn't even do anything about the problems we were having," he said.
Criss said he is very pleased with the new suppliers that he has chosen, and especially happy that Henry Plastic Molding is only 17 miles away and Masterwork Electronics (www.masterworkelectronics.com) is only an 80 minute drive. When it came to choosing between local suppliers, Criss said price was the biggest factor after proximity.
"When having people manufacture something for you or design something for you, it's really great to go see what they're doing. Or if you encounter a problem, you can sit down face to face and just work it out," Criss said.
Leslie Morrill, a product engineer with S&S Technology, a producer of medical equipment, especially illuminators and motorized viewers for radiology, said the company recently found plastic extruders in America (Indiana) that quote cheaper than the Chinese broker they had been using. Even though S&S Technology had to pay to retool the part, the overall price of the high-volume part--with shipping costs factored in--was lower. The decision was based on a quality issue as well, Morrill said. S&S Technology was trying to get its Chinese supplier to use a certain glue to attach magnets to the injection-molded bin, but the supplier didn't follow through due to a lack of dedication to quality and a breakdown in communication. "They didn't control it the way we would expect them to, and we're not big enough--and our pockets aren't deep enough--for us to have somebody go over there and inspect anything," said Morrill. "We only get to see it after it has made its way across the ocean, and by then, you're kind of stuck with it."
Contract Manufacturers Re-shoring and Gaining Business From Overseas
Presair President Art Blumenthal said he decided to move his production of electronic switches back to the U.S. from China last summer due to decreased lead times, better communications, and freeing up of cash flow.
"Many Chinese factories these days are requiring 25 percent or more up front," Blumenthal said. "If you have a four-week lead time on manufacturing a product, your deposit sits with the manufacturer for that four weeks. Then there's another four weeks while the product is in transit to the U.S. By contrast, in the United States, there are usually 30-day terms available, so versus Far Eastern manufacturing, that's another four weeks. You can see that by producing in the U.S., we're gaining twelve weeks of cash flow.
"That's really an important factor for us because our electronics business is growing rapidly," he continued. "Supporting a growing business requires greater cash demands. We've doubled our business since last year already and we hope to double it again next year."
Presair has been manufacturing pneumatic air switches in Mamaroneck, N.Y. for the past 37 years, but expanded its business to manufacture electronic switches in China three years ago. One of its biggest electronics customers is Jacuzzi Brazil. By coming back to the U.S. for electronic production, Presair, with its 20 employees, will see electronics costs jump about eight percent. But Blumenthal believes those higher costs will soon evaporate with the rising costs of labor overseas and economic factors affecting China. Along with the increasing value of the Yuan and rising salaries coupled with a higher standard of living, there will likely be significant increases in Chinese manufacturing costs, Blumenthal explained.
"I think the difference in cost between Chinese manufacturing and U.S. manufacturing will really begin to shrink considerably and we'll see that coming in three to five years; maybe even sooner than that," Blumenthal said.
Presair () is looking to expand its facility in New York or neighboring Connecticut, and is currently subcontracting some of the electronics work out to suppliers in New York. Future plans to bring that work in-house will also help the cost differential disappear, he said.
By manufacturing switches in the U.S. for more than 30 years and re-shoring work from overseas, Presair is trying to be a "good citizen" company, Blumenthal said.
"I really feel the U.S. has gone through an extended period of reducing its manufacturing capacity and now, somewhat to our detriment, we have become a service economy rather than a manufacturing economy," Blumenthal said. "Mostly, the move away from U.S. manufacturing has been to the disadvantage of the workers here, and I would just like to see the U.S. regain some more jobs, so that's really an important consideration for us."
Infinity Plastics Group, a plastics injection molding facility in southwestern Indiana that focuses on medical products requiring a certified, cleanroom manufacturing environment, is currently working with a medical device manufacturer who is in the process of re-shoring from China. The customer's reasons for looking to a domestic supplier were lack of proper controls for FDA requirements, difficulty with communications, logistical delays, and IP concerns, said Randy Calvert, director of sales and marketing for Infinity (www.infinity-mai.com).
"The biggest concern they had was logistics. They had a very difficult time just getting parts in and out seamlessly, and the communications issues they dealt with were very tough. They also had some concerns with intellectual property and how to stay protected over there," Calvert said. "Communications are much easier here and logistics are much more simplified when you're shipping domestically. We run a lot of programs in which we sign non-disclosure confidentiality agreements, and we honor those on a regular basis. We protect our customers."
Calvert said he is hearing more customers voicing their concerns with working with Chinese suppliers. Being able to communicate well with customers to meet their needs and expectations has put them ahead of overseas competition.
Mary Jo Jerome, vice president of Certified Machine & Design, a small weld fabrication job shop in Oklahoma City, Okla., is slowly converting the supply of tooling, such as inserts, boring bars, and twist tools for her machines back to the U.S. from Japan. She said delays of a Mitsubishi brand insert were caused by the recent tsunami that hit Japan and made her look into domestic suppliers.
"I am willing to put price aside as long as the quality is good, because we can't be buying something just because it's made in the USA or support USA manufacturing 'just because.' We still have to make money and it still has to be good quality," she said.
When looking for a domestic supplier, Jerome said customer service is as important as price. "It's very important that they want to get to know our business and don't try to sell me something I don't even use. Don't tell me about your deal if I buy 100 of these inserts that are made to cut brass because I only cut brass maybe three times a year. They need to learn that sales is about building relationships," she said.
Jerome said the company (www.certifiedmachine.com) has gained some customers who have brought their made-in-China "junk" to her so she can fix it. "The Chinese don't know the difference between carbon steel and stainless steel and don't even do quality checks on their stuff. I told them (my customer) the Chinese had carbon steel mixed up in a stainless steel order and you have to use a different tool with that. We always help them out of their Chinese bind. We laugh and joke about it. If they only knew."
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