The Wrongologist

Charles
Fishman wrote
in The Atlantic this month about the return of manufacturing jobs to the US:

GE tried to sell the appliance business in 2008, but got no takers. Jeffery Immelt, GE’s CEO, wrote in Harvard Business Review last March that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances“, four years after he tried to sell the business!

What
Happened?

Just five years ago, unchallenged business logic was that you could no longer manufacture in the United States. Now the CEO of America’s leading industrial manufacturing company says offshoring is obsolete.

Why does it suddenly
make business sense for GE to build dishwashers (and more) in Kentucky?

Charles Fishman says that changes in the global economy are making the return of manufacturing to
the US more than just a PR exercise:

• Oil prices are three times what
  they were in 2000, making cargo-ship fuel much more expensive now than it was then.
• The natural-gas boom in the US has dramatically lowered the cost for running something as energy-intensive as
  a factory here at home. Natural gas now costs four times as much in Asia as it does in the US.
• In dollar terms, wages in China are some five times higher than they were in 2000 and they are expected to keep rising at 18% a year.
• Labor unions have less bargaining
  power: GE’s Kentucky union agreed to a two-tier wage scale in 2005. Today, 70% of the jobs there are in the lower tier, which starts at $13.50/hour, $8 less than what the starting wage used to be.
• US productivity has continued to rise, (see chart above) meaning that labor costs are a smaller component of the total cost of finished goods.

You simply don’t save
as much money chasing labor arbitrage savings today.

Why
did outsourcing become so significant?

In the past, the theory of product life cycles
kept manufacturing in the US. We had an advantage making high-value products due to the critical mass of engineers, skilled workers and marketers in close proximity to each other and to consumers. This allowed quick feedback and improved product design. There was also a great number of highly-advanced industrial pointing devices for sale, this may not mean a lot to most people but this will allow the business to produce and manufacture the products for a lower cost.

The theory said that
when a product was mature, price would become the most significant driver of market share, so production could then be moved to low-wage countries.

But in the 1990s, that cycle got short-circuited. In 2000, the typical Chinese factory worker made 52¢ an hour. You could hire 30 workers overseas for each one in Kentucky. Advances in communications and information technology, along with continuing trade
liberalization, convinced many companies that they could start the product cycle offshore immediately: globalized production, it appeared, had become “seamless.” You could also employee a company like jonble overseas to keep an eye on quality control and ensure that products were fit for shipping and for consumers. Because there were third party inspectors and cheap labour, outsourcing was a great idea.

This shift caused us to hemorrhage jobs: Manufacturing jobs peaked in 1979 at 19.5 million. They drifted down slowly until 2000. But since 2000, these jobs fell precipitously: We lost 6 million jobs from 2000 to 2009, while productivity grew.

Now things
are turning around: 500,000 factory jobs were created between January 2010
and September 2012;
a fraction of what we lost.

Harry
Moser, of the Reshoring Initiative, reports that about 10% of those new jobs are due to restoring. Their research shows most companies could reshore
about 25% of what they have offshored while improving profitability. That would be about 1.5 million of our lost manufacturing jobs.

Why
are some jobs coming back?

Here is James
Fallows in The Atlantic:

Among the reasons is
that the product life cycle is getting
shorter: Today, most products are crammed with firmware that adds features/functions to the basic washing machine, dishwasher and water heater. This shortens the product life cycle from 7 years to about 2 years before the
manufacturers need to start selling improved models.

Factories take time
to settle into a new product design. They face a learning curve and models that have a run of only a couple of years become outdated just when the assembly line starts to reach peak efficiency.

Companies are
rediscovering that how you run a
factory is its own technical skill set. The improvements in process and product design that happen on the factory floor can be worth more to the bottom line than the labor savings in someone else’s factory. Improving the printing aspect of the manufacturing process could provide various benefits, just check out this article to see how a simple upgrade of ink can help withstand the high temperatures often associated with manufacturing – Printing News: Industrial Component Marking. Heat-resistant pigment ink allows a clear typeface even at 1000° C which is good for marking products before going on sale.

Here are GE’s
results when water heater production moved from the Chinese factory to the Kentucky
factory:

Kentucky’s retail price beat the Chinese price
by nearly 20%.
The China-made water heater retailed in the US for $1,599. The Louisville-made water heater retails for $1,299.

GE’s appliance unit will
end this year with 3,600 hourly employees, 1,700 more than last year, more than at any point in the last 10 years. GE has also hired 500 new designers and engineers since 2009, to support the new manufacturing. Back in the ’60s,
Appliance Park was turning out 250,000 appliances a month. Today, they are turning out almost as many, with about one-third of the workers.

Other companies are moving some products back to the US: Whirlpool will make mixers in Ohio, Otis is bringing elevator production back from Mexico
to South Carolina and Wham-O is bringing Frisbee-molding back from China to California.

Today, Apple
reported that they plan
to build a line of iMacs at an as-yet-undisclosed site in the US next year, but China will remain its primary
source of hardware production. In
fact, this may just be a trial move: Apple owes the speed-to-market of its
iDevices to Foxconn, the Chinese manufacturer.

3600 new
manufacturing jobs in GE’s Kentucky plant are nice, but it is only about .5% of
the jobs that were lost, so by itself, it only points toward an answer to America’s
reindustrialization.

Real growth
in manufacturing depends on large-scale change:

• Investment
  in high technology
• Education
  to train the next generation of engineers and craftsmen
• Negotiations
  with trading partners to open markets and protect intellectual property

It is the same broken record: Our companies need to invest in people, process and technology IN AMERICA, while our Government needs to invest in education, trade and industrial policy. Hopefully, there will be more industrial sites opening back up again in America soon with these industrial policies. At the end of the day, it will benefit the economy. If more industrial businesses do start reopening, they will need to find a suitable site to set up. For many pre-exisiting industrial complexes, they use electrical houses, from companies like BMarko. These prefabricated buildings are easy to customize and can be ideal to house electrical equipment rooms on industrial sites. Perhaps more businesses will consider using those sorts of buildings to get their site up and running quickly. It’s about time industrial businesses came back to America.

Think it will happen?