Could a key to restarting our domestic manufacturing be removing petroleum subsidies?
During the great decline in American manufacturing since World War II, many policies and phenomena have layered upon one another to create an environment where the American worker has struggled to compete with his or her international counterpart. Education deterioration, misallocation of infrastructure spending, unionized labor, regulation, and tax subsidies for all things transportation related have coincided with the unlocking of overseas labor pools and vast urbanization of whole populations eager to compete and build anything from cars to iPods. This has left an American landscape of once industrial towns and cities littered with relics of a glorious past.
One of the enablers of out-sourcing our ability to make stuff has been the artificial suppression of petroleum prices that allow for gadgets, food, and other commodities and raw materials to travel around the globe while keeping prices unrealistically low. This equation has relied upon stable energy supplies to fuel it. Now, with the oil supply and costs running steadily higher than times past, the equation is starting to tip the other direction where once again it could be cheaper to make things here. If the United States removed the billions of dollars it spends subsidizing oil exploration, extraction, and delivery, the once-hidden price of shipping will make more favorable and sensible the producing of goods closer to where they are needed. This will cut on not only transportation costs but warehousing and stockpiling costs as well. Shifting to an "on-demand" supply chain will make us more resilient to fluctuations in the market as it will be inherently less wise to overbuild.
As Reuter's Scott Malone reports, reversing the energy subsidy will not completely account for the return of American manufacturing but it could significantly restructure the way goods, both domestically and internationally, are brought to market. Doing so will seriously improve the strength of our towns and their local economies.
Small group of companies are boosting production at their U.S. factories
By Scott Malone
MILWAUKEE — On a recent morning at Master Lock's 90-year-old factory in Milwaukee, a cluster of machinery was whirring, every 2 seconds spitting out one of the combination locks used by American high schoolers as the company readied for the back-to-school rush.
The seven-day-a-week, three-shift-per-day whirlwind of activity marked a change from two years ago, when the machine normally ran for just a few hours a day because the unit of Fortune Brands Inc was ordering more padlocks from suppliers in China instead of making them.
Why move production from the world's low-cost workshop back to a unionized U.S. factory where wages are six times higher than in China? Efficiency: The machine in Milwaukee is about 30 times as fast as the Chinese factories the company had been buying from, more than making up for the difference in wages.
"I can manufacture combination locks in Milwaukee for less of a cost than I can in China," said Bob Rice, a senior vice president at the largest U.S. padlock manufacturer.
The factory has added about 78 workers over the past two years, boosting its workforce to 440.
That is a small bit of good news for the long-suffering U.S. manufacturing sector, which shed about 2 million jobs, or some 14.6 percent of its employees, in the last recession. It has not recovered since and now employs 11.7 million people, down 34,000 from the recession's official end in June 2009.
Master Lock is not alone. General Electric Co and Boeing Co are also part of the small group of U.S. companies that are boosting production at their U.S. factories.
A variety of factors are driving the shift, including rising wages in parts of Asia, surging fuel prices and the complexity of transporting goods across the Pacific.
"What you're starting to see is the economics shifting more into the United States' favor regarding sourcing from the United States versus sourcing from a low-cost country," said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, a Washington trade group.
There is an element of irony here. The United States' sluggish economic recovery, coming at a time when emerging economies including China and India are enjoying brisk growth, is helping its manufacturers to close the cost gap on their foreign rivals.
China's inflation rate hit 5.5 percent in May, well ahead of the United States' 3.6 percent headline rate. With Chinese wages rising at 15 to 20 percent per year, the labor costs of manufacturing in the two countries could pull even by 2015, a Boston Consulting Group study predicted in May.
Rising oil prices, which drive up the cost of shipping goods by boat or plane, are also eating in to China's edge.
Automation also helps tilt the balance toward the United States. Bruce Crass, the Master Lock plant's general manager, estimated that his plant -- where the average worker oversees the operation of six high-speed machines -- produces 24,000 locks a day with about one-sixth the number of workers needed by the company's Chinese suppliers and rivals.
Master Lock today makes about 55 percent of its padlocks in North America -- in Milwaukee and at a satellite location in Nogales, Mexico -- with the rest made in China. That is down from a 50-50 split two years ago.
To be sure, these companies are the exception in the U.S. economy, where businesses from Apple Inc to Nike Inc focus on design and marketing, leaving production to independent contractors.
Changing focus to 'sytem costs'
U.S. makers of everything from running shoes to refrigerators shifted much of their production overseas over the past few decades, chasing the low unit prices that foreign factories could offer as a result of their lower wages.
But over time, executives said, much of those savings have been erased by other costs that crept up -- goods damaged in transit, the need to maintain traveling quality-control staffs and the need to maintain about twice as much inventory as a hedge against delays in shipping.
"When you start adding all those other costs in you start getting a little different picture of how you can be competitive," said James Campbell, chief executive of GE's appliance unit. "We were very focused on the unit cost ... What really started to dawn on us is it's the system costs. That's a very different approach."
GE is ramping up its U.S. production of appliances, reversing course on a business the largest U.S. conglomerate tried to sell in 2008. Over the past year it has added more than 200 employees at its Louisville, Kentucky, factories that make washing machines and dishwashers.
Over the next three years it plans to invest $1 billion in that facility and add another 1,000 workers to the current 4,000-member workforce. It aims to produce about 40 percent of its products at company-owned U.S. factories, up from about one-third now, Campbell said.
That is not to say that GE is pulling back from its foreign operations. The company last year generated 53 percent of its revenue outside the United States, a number that it is likely to rise as it continues to invest in fast-growing economies including China, India, Brazil and the Middle East.
In some ways stepping up domestic manufacturing reflects a lesson the company learned abroad -- that it helps to manufacture goods closer to its customers.
Some heavy manufacturers are also rethinking the advantages of turning manufacturing over to independent contractors.
Boeing is a case in point. With its 787 Dreamliner aircraft running three years behind schedule, in part due to its decision to outsource large portions of manufacturing over to outside suppliers, the planemaker is bringing more of its production back in-house, though not necessarily to the United States, said Stan Deal, a vice president at the company.
"What we have been looking at is where do we have a competitive advantage?" Deal said. "What we've been looking at is our design capability and recognizing that we need to have a certain amount of manufacturing capability very close to the design capability."
It is also important to note that not all U.S. manufacturers that are currently adding jobs -- a group that also includes automakers General Motors Co and Ford Motor Co -- represent a return of production to the United States. In some cases they are restoring jobs they had cut during the downturn -- a trend also seen outside the manufacturing sector, at companies from JPMorgan Chase & Co to Hewlett-Packard Co.
Limited rebound potential
While more U.S. companies may reconsider manufacturing in their home country, there are clear limits on how far this trend can run, analysts and executives said.
The companies that are bringing back some production have no plans to return to a 100 percent U.S. supply base. Executives cautioned that firms that have entirely outsourced their manufacturing operations are unlikely to be willing or able to make the investments needed to restart it from scratch.
"A lot of U.S. companies have divested their capital equipment," said Master Lock's Rice. "If it would take millions of dollars' worth of capital equipment potentially to produce their product, they may pursue another, lower-labor-cost country, like Vietnam or Thailand."
Further, no manufacturer works in a vacuum. Factories rely on suppliers of raw materials or components of the goods they manufacture, which may no longer be locally produced.
"If you're going to go into the high-tech electronics business here in the States, most likely a big portion of your high-tech electronic components are going to be sourced from China," said Cort Jacoby, a principal in the supply-chain group at Archstone Consulting, a unit of the Hackett Group Inc . "Then the question becomes, what is the true value-add that's going to take place in the United States?"
Beyond that, a company that has outsourced most or all of its manufacturing may find that it no longer has a pool of engineers, plant managers or other workers with the experience to resume production.
"There was always this notion that if you controlled the design and the brand, you could park your production somewhere else," said GE's Campbell. "I'm not sure that's completely true anymore. Because what happens over time is you lose competency."