A growing number of American companies are moving their manufacturing back to the United States
IN 2005, A START-UP company from California called ET Water Systems decided to move its manufacturing operations to China. At the time there was a general exodus to Asia in search of lower costs, recalls Mark Coopersmith, the firm’s chief executive. ET Water Systems, which builds sophisticated irrigation devices for businesses, quickly started losing money, not least because it had so much capital tied up in big shipments of goods which took weeks to cross the oceans. Innovation suffered from the distance between manufacturing and design, and quality became a problem too.
When five years later Mr Coopersmith investigated the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door. ET Water Systems’ new manufacturing partner, General Electronics Assembly, is in San Jose. As it happens, the firm’s owner has a Chinese background and a large portion of its employees are of South-East Asian origin.
The number of firms known to have “reshored” manufacturing to America is well under 100. Doubtless many more are doing so quietly. Examples range from the tiny, such as ET Water Systems, to the enormous, such as General Electric, which last year moved manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky which not long ago had been expected to close. Google has attracted a great deal of attention for deciding to make its Nexus Q, a new media streamer, in San Jose.
The reshoring movement has to be kept in proportion. Most of the multinationals involved are bringing back only some of their production destined for the American market. Much of what they had moved over the past few decades remains overseas. And for many of the biggest firms the amount of work that they are still sending abroad outweighs the amount that they are bringing back onshore. Caterpillar, for example, is opening a new factory in Texas to make excavators, but has also just announced that it will expand its research and development activities in China.
According to a survey conducted by Harvard Business School last year, many firms are still deciding against basing activities in America. Professors Michael Porter and Jan Rivkin asked HBS alumni who were running businesses about their choices of location and found that many of them were deciding to leave because they thought wages abroad were lower than at home. Another important reason, though, was to be near customers in big new markets, which this report does not see as offshoring in the conventional sense. Messrs Porter and Rivkin argue that firms are now ready to reconsider offshoring. They realise that in many cases they overdid it, and are discovering hidden costs in moving production a long way from home. But, the authors argue, America’s government is not making the country’s business environment attractive enough for companies to want to come back.
Given the political pressure, it is natural for companies to want to publicise anything that looks like reshoring. Lenovo says that its decision to bring back computer-making to North Carolina was a way of looking after the firm’s reputation as well as bringing direct business benefits. The Chinese firm’s global supply-chain chief, Gerry Smith, says he has received dozens of telephone calls from former university classmates to congratulate him on the move.
But reshoring amounts to much more than public relations. It is being driven by powerful forces and will only get stronger. In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers. The most common reason given was higher Chinese labour costs. The Massachusetts Institute of Technology looked at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm plans to bring some manufacturing back to America and one-third were actively considering such a move. A study last year by the Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing, produced similar results. It expects the outflow of manufacturing from high- to low-cost countries to slow over the next two years and the reshoring to double over the previous two years. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.
The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.
By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent, and when they happen, says one executive, the government often tells the plant manager to meet workers’ demands immediately. Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its Chinese workers a 47% pay rise after strikes in 2010. Foxconn Technology Group, a subsidiary of Hon Hai Precision Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing.
The pushmi…
BCG used to argue that companies unwilling to send their manufacturing to lower-cost countries were putting their very future in jeopardy. Now it says that companies will bring manufacturing back to America from China. As soon as 2015, says Hal Sirkin, a consultant at the firm, it will cost about the same to manufacture goods for the American market in certain parts of America as in China in many industries, including computers and electronics, machinery, appliances, electrical equipment and furniture. That calculation takes into account a wide variety of direct costs, including labour, property and transport, as well as indirect ones such as supply-chain risk.
After decades of complaining about American and European workers’ high pay, cushy conditions and unreasonable expectations, businesspeople now increasingly moan about Chinese workers. Their aspirations are rising and they are less willing to work long hours in boring factory jobs. A new labour law introduced in 2008 brought in more protection for workers, including the right to a permanent contract after a year of emp
loyment, and
workers are more aware of their rights. One consultant jokes that it is getting as hard to fire people in China as in France.
“China’s labour market is so overstretched that all the high-quality labour has been exhausted, you have to hire people with lesser qualifications, and then quality becomes a problem,” says Alain Deurwaerder, who until recently ran a factory in Thailand for Ducati, an Italian motorbike-maker. Another European chief executive complains about the flightiness of his Chinese workforce: “If someone on the other side of the road offers 5% more pay, they go.”
Lorne Schaefer, the owner of Jenlo Apparel Manufacturing, a Canadian-owned clothing company, opened a factory in Liuzhou in southern China in 2008 because he could no longer find workers at home; second-generation Chinese and Vietnamese immigrants in Montreal, he says, no longer want to work in the industry. Now he is having similar problems in China. The latest generation of workers, thin on the ground because of the country’s one-child policy, are not keen to toil in factories, nor do they want to work for companies that make goods for export, since the quality standards are far higher than for domestic consumption. So even in a labour-intensive industry such as textiles, the cost benefit that China offers is quickly eroding.
“Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe”
Higher labour costs alone are not enough to prompt companies to leave China. The country has the world’s best supply chains of components for industry and its infrastructure works well. Firms have already invested heavily in being there. And companies that initially came for the low labour costs now want to stay because it has become a huge market in its own right. Nonetheless, “the incremental decision to invest in new production capacity in China has become tricky,” says Gordon Orr, Asia chairman for McKinsey.
One answer is to invest in other low-cost countries, of which there is no shortage. Myanmar, for instance, is attracting interest now that the West is lifting economic sanctions. But the scale, skill and productivity of the labour force there, and in countries such as Vietnam and Cambodia, nowhere near matches China’s, argues Mr Sirkin. And workers in those countries, too, are demanding better pay and rights.
Mexico, which has the huge advantage of bordering the United States, is increasingly attracting production destined for the Americas that would formerly have gone to China. Average pay for Mexican manufacturing workers is now only slightly higher than for Chinese ones, and the time it takes for goods to travel to North America is measured in days not months. Some firms, such as Chrysler, a car company, are even using Mexico as a base to supply the Chinese market. The country has become an important production hub for the aerospace industry. But Mexico’s poor infrastructure and highly publicised drugs-related violence may deter some firms.
Even as pay is rising rapidly in China, costs in America are falling. The successful extraction of natural gas from shale has dramatically lowered the price of energy. PricewaterhouseCoopers, an accountancy firm, reckons that these lower American energy prices could result in 1m more manufacturing jobs as firms build new factories. Companies such as Dow Chemical, a speciality chemicals firm, and Vallourec, a French steel-tubes firm, have announced new investments in America to take advantage of low gas prices and to supply extraction equipment.
…and the pullyu
Not only have American wages declined or are rising only slightly, BCG points out, but the dollar has been weakening. The workforce is becoming more flexible and productivity continues to rise. High unemployment has brought a willingness to work for lower pay, especially in southern states. These are mostly “right to work” states where individuals are free to decide whether to give financial support to a trade union, so unions are less powerful there. The very threat that jobs will be outsourced will also have played a role in keeping wages down.
Alabama, one such state, received a big boost last year when Airbus, a European aeroplane manufacturer, said it would open a big new factory. Airbus also plans to expand its production in Asia beyond its main factory in Tianjin, China, to be close to fast-growing new markets. Fabrice Brégier, the firm’s chief executive, says that for skilled workers, “China is no longer a low-cost country.”
Big unions in America have sometimes been willing to let wages fall to keep jobs at home. In 2007 the United Auto Workers union (UAW) accepted a two-tier wage structure under which some new blue-collar workers are paid only half as much as longer-serving ones. In 2011, after the government had bailed out part of the motor industry, the Big Three carmakers employed more second-tier workers, reducing their overall labour costs. Ford has brought back production from China and Mexico to Ohio and Michigan, thanks to a new agreement with the UAW.
As the example of ET Water Systems showed, transport costs are playing a big part in reshoring. Rising shipping, rail and road costs are most damaging for companies that make goods with relatively low “value-density”, such as consumer goods, appliances and furniture, according to a recent McKinsey report on global manufacturing. That makes reshoring or nearshoring more attractive. Emerson, an electrical-equipment maker, has moved factories from Asia to Mexico and North America to be closer to its customers. IKEA, a Swedish firm that makes products for the home, has opened its first factory in North America as a way to cut delivery costs, and Desa, a power-tools firm, has returned production from China to America because savings on transport and raw materials offset the higher labour costs.
In the longer term reshoring will be boosted by the use of advanced manufacturing techniques that promise to alter the economics of production, making it a far less labour-intensive process. 3-D printing, a process in which individual machines build products by depositing layer upon layer of material, is already being used in research departments and factories. Disney is developing 3-D printed lighting for interactive toys, and says that in future the interactive devices inside such toys may be printed rather than assembled by hand. Additive manufacturing machines can be left alone to print day and night. For now they are used mainly for prototyping and for complex parts, but in future they will increasingly make final products too.
Robots are already making a difference to the share of labour in total costs. Cheaper, more user-friendly and more dextrous robots are currently spreading into factories around the world, and they cost just the same in America as they do in China. Relative to the cost of labour, average robot prices since 1990 have fallen by 40-50% in many advanced economies, according to McKinsey. Baxter, a new generation of robot made by Rethink Robotics, an American firm, costs $22,000 apiece and is so safe and simple that it can be taught by an unskilled worker and operate right next to real people.
Baxter and his like may mean there will be fewer manufacturing jobs overall, but those that remain can stay close to a firm’s domestic headquarters. And even if the manufacturing activity itself does not employ many people, the supply chains that spring up around it will create new work.
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Made in the U.S.: Is America Making a Manufacturing Comeback?
in Uncategorized/by MAM TeamAs a trained industrial designer, part of my former job was to anticipate consumer needs — sometimes before consumers themselves even knew what they wanted. So in a way, I guess you could say I can see the future. In our near future, I see American-made products that are designed and manufactured here exploding, right along with consumer demand for them. Major companies such as Walmart are re-shoring and American entrepreneurship is growing in leaps and bounds thanks to more affordable tools, like laser cutting, 3-D printing and even robotics. It’s a great time to be a maker or entrepreneur.
According to a recent nationally representative survey by the Consumer Reports National Research Center, 78 percent of Americans that were given a choice between an identical product made in the U.S. and one made abroad, would rather buy the American product.
Why? Those surveyed cited the desire to retain American manufacturing jobs, concerns about using child workers or other cheap overseas labor, and lower quality goods. The recent Bangladesh factory collapse exposed pitiless working conditions to the consumer world that may not have known how bad conditions can be.
Maybe what organizations and retailers alike should be paying attention to is that more than 60 percent of all American respondents indicated they’d be willing to pay extra to buy American.
This research indicates that as consumers in 2013, we’re more inclined to know of and be informed about what’s behind our products and what kind of world they create. We’re willing to spend more when the goods we buy are aligned with our own values. We care about organic and fair trade products, locally produced products and socially and environmentally friendly products.
The demand is clear. The USDA reports farmer’s markets had a 17 percent increase from 2010 to 2011 and a 9.6 percent increase from 2011 to 2012. That’s not easy to do.
Reshoring Production
Corporations are paying attention too. We’re about to see a surge in large manufacturers returning production to the U.S. from offshore. According to Boston Consulting Group, 48 percent of the biggest firms with sales above $10 billion are planning to re-shore. Just two weeks ago we saw Lenovo open its first U.S assembly plant in North Carolina.
Other organizations are feeling a sense of corporate social responsibility towards the U.S. and the cities that house them too. Take Chrysler, for example, which emboldened its brand with what is arguably one of the Super Bowl’s most effective advertising spots: “Imported From Detroit.”
Tim Cook even spoke last December about moving Apple’s production of one of its existing Mac lines to the U.S. saying, “I don’t think we have a responsibility to create a certain kind of job, but I do think we do have a responsibility to create jobs.” Meanwhile, Apple’s new “Designed by Apple in California” TV ad campaign is shouting its American identity from the rooftops.
Garage Disruption
Perhaps most interesting is that it’s not just large organizations shifting toward the consumer demand for American-made products. If we use the United States Patent and Trademark Office as a hallmark for American ingenuity and innovation, we’ve had consecutive record years of the number of patents issued since 2010.
For better or worse, the 2007 down-turn in our economy left some jobless Americans with their own visions for innovation. At the same time, an explosion in affordable tools enabled this innovation at a micro level. We’re also seeing crowdfunding platforms like Indiegogo and Kickstarter bolster entrepreneurship like never before. Tech & Design projects on Kickstarter last year had over $79 million dollars pledged. Now that’s strong demand. With the means to see great ideas through to fruition, the next generation of great American companies is starting from the ground up.
As we celebrate the 237th birthday of the United States of America, let’s celebrate American products and the people behind these products. Let’s celebrate those who spend countless hours creating these products. Read product labels in the store, visit your local farmer’s market and check out The Grommet’s Made in the USA collection to see American entrepreneurship firsthand. I often tell people that if they start to buy just 10 percent of their gifts or products according to their values, they’ll be making a difference.
Consumer Sentiment in U.S. Unexpectedly Declined in July
in News/by MAM TeamThe recent increases in mortgage rates and prices at the gas pump may have restrained consumers’ views on the economy in the next six months. At the same time, the group’s gauge of current conditions jumped to a six-year high as stock prices approached a record after falling in the middle of June.
“It’s a slip in confidence from recent highs rather than the start of a new downward,” said Gennadiy Goldberg, a strategist at TD Securities Inc. in New York. “As we get later in the year and the economy improves, consumers will start to see better numbers and they’ll notice that.”
Forecasts of the 66 economists for sentiment in the Bloomberg survey ranged from 80 to 88. The index averaged 64.2 during the recession that ended in June 2009, and 89 in the five years prior.
The Michigan survey compares with the weekly Bloomberg Consumer Comfort Index, which climbed to minus 27.3 in the week ended July 7, the highest level in more than five years, from minus 27.5. The figures showed Americans were more upbeat about their finances than at any time since April 2008, while a gauge of the buying climate increased to a nine-week high.
Producer Prices
Other figures today showed prices paid to producers rose 0.8 percent in June, more than projected and the most since September.
The Michigan survey’s measure of current conditions, which takes stock of Americans’ views of their personal finance, increased to 99.7 in July from 93.8 at the end of last month.
The gauge of expectations six months from now fell to 73.8 from 77.8.
Mortgage rates this week climbed to the highest level in two years. The average 30-year fixed rate was 4.51 percent in the week ended yesterday, according to data from Freddie Mac. In November, it fell to a record low of 3.51 percent.
Gasoline prices have also increased this week. The average cost of a gallon of regular gas in the U.S. was $3.55 yesterday, up from $3.47 at the end of last week, according to figures from AAA, the nation’s largest motoring organization.
Job Growth
At the same time, job and income growth is helping drive consumer spending, which accounts for about 70 percent of the economy. Labor Department data last week showed employers added 195,000 workers for a second month in June. The figures also showed hourly earnings in the 12 months to June rose by the most since July 2011.
Retail sales rose 0.6 percent in May, the biggest increase in three months and propelled by a jump in motor vehicle purchases, Commerce Department figures showed last month.
Cars and light trucks sold at a 15.89 annualized rate in June, the strongest since November 2007, according to data from Ward’s Automotive Group.
General Motors Co. said June sales were up 6.5 percent from the same month last year, marking the Detroit-based company’s best sales month since September 2008.
“We’re in an economy that gets a little bit stronger each and every month,” said Kurt McNeil, vice president of U.S. sales and service, speaking during a July 2 earnings call. “The fact that the jobs data is finally trending positive, the stable fuel prices, consumer sentiment and confidence showing positive signs, we think that’s finally unlocking the American families coming in to our showrooms.”
Consumers surveyed for today’s confidence report expect an inflation rate of 3.3 percent over the next 12 months, up from the June forecast of 3 percent, today’s report showed. Over the next five years, Americans expect a 2.9 percent rate of inflation, matching the previous three months.
Crude Fluctuates as Manufacturing Expands
in Uncategorized/by MAM Team“Crude’s been adjusting to the economic data,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The manufacturing number is more forward-looking. Retail sales are still pretty good, which is probably why crude didn’t sell off a lot. The data supports the notion of modest growth.”
WTI for August delivery fell 5 cents to $105.90 a barrel at 11:28 a.m. on the New York Mercantile Exchange. The volume of all futures traded was 7.4 percent below the 100-day average for the time of day. The contract climbed $1.04 on July 12, capping a 13 percent rally over three weeks.
Brent for August settlement gained 19 cents to $109 a barrel on the London-based ICE Futures Europe exchange. Volume was 6.9 percent below 100-day average. Brent’s premium over WTI widened to as much as $3.43. The spread was $1.99 on July 10, the narrowest based on closing prices since November 2010.
July ManufacturingThe July manufacturing index was higher than last month’s 7.8. Readings greater than zero signal expansion in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey of 50 economists called for a reading of 5.
The June retail sales growth was slower than the 0.8 percent gain forecast by economists surveyed by Bloomberg. It followed a 0.5 percent increase in May that was less than previously reported, the Commerce Department said. Consumer spending is the biggest part of the economy.
“The retail sales number is not as good as expected,” said Bill Baruch, a senior market strategist at commodities trading firm Iitrader.com in Chicago. “It’s a bearish day for crude.”
Oil was supported by concern that tension in Egypt will disrupt Middle East exports.
Egypt DemonstrationsDemonstrations in Egypt, which may target military sites, are building on efforts by the Muslim Brotherhood to squeeze the army after it pushed Mursi from power on July 3 following a wave of protests against his rule. A combined 2.24 million barrels a day of oil were shipped from the Red Sea to Europe and North America in 2011 via the Suez Canal and the Suez-Mediterranean pipeline, Energy Department data show.
“Things are still messy in Egypt and that’s supportive for oil,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC.
Prices declined earlier as China’s economic growth slowed. Gross domestic product increased 7.5 percent in the second quarter as growth in factory output and fixed-asset investment weakened, the National Bureau of Statistics said.
China’s growth was the slowest in three quarters and extended the longest streak of sub-8 percent expansion in at least two decades.
The U.S. and China accounted for about a third of the world’s oil consumption in 2012, according to BP Plc’s Statistical Review of World Energy.
Chinese DemandOil consumption in China surged 11 percent from a year ago to about 10 million barrels a day last month, the statistics data showed.
Hedge funds increased bullish bets on WTI to the highest level since May 2011, the U.S. Commodity Futures Trading Commission said July 12. Money managers boosted their net-long positions on WTI, or wagers that prices will rise, by 6.9 percent to 281,918 futures and options combined in the seven days ended July 9, the CFTC said in its Commitments of Traders report.
Bullish bets on Brent outnumbered short positions by 176,988 lots, the ICE Futures Europe said.
Goldman Sachs Group Inc. said price risks for Brent crude in the second half of the year have changed “to the upside” amid production losses in some Organization of Petroleum Exporting Countries nations and political threats to supply.
Reductions in output from Libya, Iraq and Nigeria have the potential to limit availability, the bank said today in an e-mailed report.
Can the Future of Tech Truly Be Made in America?
in Uncategorized/by MAM TeamIt’s hard to say whether or not that supper directly yielded any meaningful results in terms of domestic job creation. It has, however, contributed to a broader renewed interest in bringing jobs back from overseas among tech heavyweights looking to earn some political goodwill, even as they carefully balance the cost-minimizing demands of investors.
Can the future of tech truly be made in America?
The Mac maker
Apple in particular has taken a majority of the criticism, largely due to its increasing scope of influence on the global economy. The Mac maker outsourced production to overseas manufacturing partners in the late ’90s under the direction of Tim Cook, who joined the company in 1998 as Apple flirted with bankruptcy and every dollar counted.
Steve Jobs made it clear that “those jobs aren’t coming back” because the U.S. has a smaller supply of mid-level industrial engineers relative to countries like China. That was then, but Tim Cook has since become CEO. Cook differs from his predecessor in many ways, including his willingness to bring some jobs back. The new Mac Pro, for example, will be assembled in the U.S.
Apple’s new marketing campaign that focuses on its brand also emphasizes its “Designed by Apple in California” signature. During his tax grilling, Cook reiterated numerous times how proud he was that 95% of Apple’s research and development takes place stateside, despite scrutiny over the IP rights that Apple shares with its Irish subsidiary.
The search giant
Google has also made similarly patriotic pushes. The search giant was originally planning to launch a Nexus Q streaming set-top box last year that was proudly manufactured in the U.S. The Nexus Q would be doomed, largely due to its high price and limited functionality, and Google discontinued it before retail launch. The domestic assembly inevitably added to the Nexus Q’s costs.
More recently, Google is about to launch its highly anticipated Moto X — its “iPhone killer,” as it were. The new device may launch as early as next month on Verizon Wireless. In preparation, Big G launched a new ad campaign — on July 4th weekend, no less — that proudly describes the device as “Designed by you. Assembled in the USA.”
The software bellwether
Microsoft hasn’t been overly concerned with the domestic assembly debate, though, seeing as how its forte has historically always been software. The company has never really had much meaningful presence in China with either customers (due to piracy) or suppliers.
That might change soon, though, as Microsoft increasingly looks to create its own first-party devices in the pursuit of becoming a devices-and-services company. Its Surface tablets are currently assembled by Taiwanese contract manufacturer Pegatron. Foxconn builds the Xbox 360. Pegatron and Foxconn are Apple’s two main manufacturers also.
At what cost?
It also depends on the definition of “Assembled in the USA.” In order for a company to earn that mark, the Federal Trade Commission requires:
The tech giants can bring some of these jobs back home to bolster the domestic economy in the name of patriotism, but they can’t bring them all back. It would just cost too much.
Manufacturing in New York Area Expands More Than Forecast
in Uncategorized/by MAM TeamSustained demand from stronger housing and auto sales is underpinning improvement in manufacturing, which accounts for about 12 percent of the economy. Stronger household balance sheets and inventory building by companies may help factories offset weaker global markets such as China and Europe.
“What you have is an uncertainty on general economics being largely balanced off by strength in two very, very critical sectors: housing and vehicles,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania said before the report.
Estimates in the Bloomberg survey ranged from 0.0 to 10.
Retail sales rose less than projected in June as demand cooled at building materials outlets and restaurants, underscoring a second-quarter slowdown in the U.S. economy, another report showed today.
Retail SalesThe 0.4 percent gain in purchases followed a 0.5 percent increase in May that was less than previously reported, according to Commerce Department figures. The median forecast of 82 economists surveyed by Bloomberg called for a 0.8 percent advance. Excluding the biggest jump in automobile purchases since November, sales were unchanged.
Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing in September rose 0.3 percent to 1,680.19 at 8:45 a.m. in New York after data showed China’s economy grew as projected in the second quarter.
The Empire State gauge of new orders rose to 3.8 this month from minus 6.7 in June. A measure of shipments increased to 9 from minus 11.8, the lowest level in four years. A measure of factory employment improved to 3.3 from 0.
MSC Industrial Direct Co., a provider of office and industrial equipment, posted earnings and revenue that beat analysts’ estimates for the fiscal third quarter even as the company reported a weaker demand environment in the metalworking manufacturing sector.
‘Growing Confidence’“This isn’t 2008, 2009, but it’s very sluggish,” Erik Gershwind, chief executive officer of the Melville, New York-based company, said on a July 10 conference call, adding “discussions with supply chain executives at our key customers give me growing confidence that significant manufacturing growth is likely for North America over the next decade.”
Factory executives in the New York Fed region were more optimistic about the future in July than in the prior month. The gauge measuring the outlook six months from now climbed to 32, the highest since March, from 25.
“That’s a tremendously positive sign,” Naroff said. “They think that, even with rising interest rates, the economy has enough momentum to push through it.”
The majority of those polled this month, 65.2 percent, said they planned on making no or few changes to their workforces over the next year in response to the Affordable Care Act, according to results of a supplemental question.
Economists monitor the New York report and Philadelphia Fed factory readings, due Thursday, for clues about the Institute for Supply Management figures on U.S. manufacturing, scheduled for release Aug. 1.
U.S. Manufacturing Has a Promising Future, Says Consultant
in Uncategorized/by MAM TeamChina leveraged its low wages to create jobs. It built infrastructure and ports to accommodate businesses and clustered similar industries within its cities.
“China made sure manufacturers had everything they needed to succeed,” he said.
However, its success caused its economy to change quickly, he added.
In China’s Yangtze River Delta, for instance, workers were being paid average wages of 72 cents per hour in 2000. Those wages rose to $2.79 per hour by 2010. That growth in wages is expected to continue, he said.
Meantime, U.S. manufacturing has become more efficient, using fewer workers, meaning that many manufacturers are finding it less expensive to establish operations stateside.
“The threat from China is large,” he said. But he added, “the tide is turning in favor of U.S. companies.”
He also praised the BEAM initiative, which seeks to grow manufacturing through cooperation among leaders in Louisville and Lexington.
“BEAM is the prototype for what we need to do to make the economy work,” he said. “Bringing together areas is a very important thing. This is key to American competitiveness.”
Are Manufacturing Jobs Moving Back to The U.S.?
in Manufacturing/by MAM TeamReposted from VOXXI:
Is there a reverse in manufacturing trends? Late last year, Apple announced that it was moving part of its manufacturing back to the U.S. Many saw this as a PR stunt by the company, as it had suffered an blow to its image after the media looked into problems with Apple’s Chinese production partnership with Foxconn. Apple users were shocked to learn that the company’s iPhone was being built in a factory that violated workers’ rights.
Apple has dumped Foxconn for other reasons and is now manufacturing iPhones with a different company, also in China. The production of Mac minis, however, will now occur in the U.S. The move is generally seen only as symbolic because the company, which has $121 billion in cash, is only investing $1 million for its production facility in the U.S.
But Apple is not alone in insourcing — and it’s not because these companies want to win a PR battle or appease American consumers. It’s all about money.
The Manufacturing Jobs Giant
In the 1980s, it was Japan who became the manufacturing giant. We all feared the great rising sun of Japan; its economy was expanding at a dramatic rate, just like China’s is now. And just about every product in the U.S. had that ominous mark: Made in Japan. When Japan became too expensive, manufacturing moved to Mexico, Taiwan and Korea. Korea is still relatively cheap, but Korean companies have actually gone off shore to cheaper places like Guatemala and Haiti.
The International Labor Organization claims real wages in Asia between 2000 and 2008 rose by 7.1 – 7.8 percent per year. Continuing on this trend of rising real wages, the 2012 National Bureau of Statistics of China report estimated that wages in the urban areas of China experienced an increase of 17.1 percent in 2011. This trend is not good if you’re looking to hire workers in Asia to build something for you. But there are other problems, too.
According to an article in The Economist, Chinese workers are organizing. When they strike, they get pay raises — and not just the small 5 or 10 percent raises we get in the U.S. Wages sometimes double overnight after the government demands companies meet workers’ demands, as happened recently to Honda. The company had to give a 47 percent raise to workers at its Chinese auto plant.
Meanwhile, Mexico’s average pay in manufacturing is almost equal to that of China, and with its proximity to the U.S., it’s becoming a better deal for companies. Manufacturing costs are also coming down in the U.S. thanks to lower energy costs.
Apple’s insourcing is high-profile because it’s Apple. But GE has also brought manufacturing home in a big way — much bigger than Apple. GE is spending nearly $1 billion in redressing one of its idle manufacturing plants in Louisville, Kentucky.
This is a serious move by GE, one they expect to make money on. Nonetheless, GE will continue to build in China.
According to Charles Fishman who wrote an article on insourcing for The Atlantic, the issue of cost is not just about wages. The equation is complicated and has to take into account many things including energy costs. For some companies, the math is showing it would be better and cheaper to build in the U.S.
Manufacturing jobs in the U.S.
This is nothing new. Some foreign auto companies have been manufacturing and assembling in the U.S. for years now: Honda, Hyundai and Mercedes-Benz all have manufacturing plants in Alabama. Subaru has its plant in Indiana, and Toyota has plants in Missouri, Alabama and Tennessee.
Many companies (less than 100) have moved manufacturing back to the U.S. in the last few years. Apple’s move might be for PR purposes, and it might not be. But after the Great Recession, it appears lessons have been learned.
If more companies really studied their bottom line, they might see that manufacturing in the U.S. might yield stronger profits, and strengthen the country as a whole.
But the big question remains: Will this trend last?
Reshoring Manufacturing: American Companies Moving Back To USA
in Manufacturing/by MAM TeamWhen five years later Mr Coopersmith investigated the difference between the total cost of production in China and America, including the cost of shipping, customs duties and other fees, he was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door. ET Water Systems’ new manufacturing partner, General Electronics Assembly, is in San Jose. As it happens, the firm’s owner has a Chinese background and a large portion of its employees are of South-East Asian origin. The number of firms known to have “reshored” manufacturing to America is well under 100. Doubtless many more are doing so quietly. Examples range from the tiny, such as ET Water Systems, to the enormous, such as General Electric, which last year moved manufacturing of washing machines, fridges and heaters back from China to a factory in Kentucky which not long ago had been expected to close. Google has attracted a great deal of attention for deciding to make its Nexus Q, a new media streamer, in San Jose.
The reshoring movement has to be kept in proportion. Most of the multinationals involved are bringing back only some of their production destined for the American market. Much of what they had moved over the past few decades remains overseas. And for many of the biggest firms the amount of work that they are still sending abroad outweighs the amount that they are bringing back onshore. Caterpillar, for example, is opening a new factory in Texas to make excavators, but has also just announced that it will expand its research and development activities in China.
According to a survey conducted by Harvard Business School last year, many firms are still deciding against basing activities in America. Professors Michael Porter and Jan Rivkin asked HBS alumni who were running businesses about their choices of location and found that many of them were deciding to leave because they thought wages abroad were lower than at home. Another important reason, though, was to be near customers in big new markets, which this report does not see as offshoring in the conventional sense. Messrs Porter and Rivkin argue that firms are now ready to reconsider offshoring. They realise that in many cases they overdid it, and are discovering hidden costs in moving production a long way from home. But, the authors argue, America’s government is not making the country’s business environment attractive enough for companies to want to come back.
Given the political pressure, it is natural for companies to want to publicise anything that looks like reshoring. Lenovo says that its decision to bring back computer-making to North Carolina was a way of looking after the firm’s reputation as well as bringing direct business benefits. The Chinese firm’s global supply-chain chief, Gerry Smith, says he has received dozens of telephone calls from former university classmates to congratulate him on the move.
But reshoring amounts to much more than public relations. It is being driven by powerful forces and will only get stronger. In a survey of American manufacturing companies by the Boston Consulting Group (BCG) in April 2012, 37% of those with annual sales above $1 billion said they were planning or actively considering shifting production facilities from China to America. Of the very biggest firms, with sales above $10 billion, 48% came out as reshorers. The most common reason given was higher Chinese labour costs. The Massachusetts Institute of Technology looked at 108 American manufacturing firms with multinational operations last summer. It found that 14% of them had firm plans to bring some manufacturing back to America and one-third were actively considering such a move. A study last year by the Hackett Group, a Florida-based firm that advises companies on offshoring and outsourcing, produced similar results. It expects the outflow of manufacturing from high- to low-cost countries to slow over the next two years and the reshoring to double over the previous two years. “The offshoring of manufacturing is now rapidly moving towards equilibrium [zero net offshoring],” says Michel Janssen, the firm’s head of research.
The crucial change that has taken place over the past decade or so is that wages in low-cost countries have soared. According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe, according to a recent study by the Hay Group, a consulting firm. Pay in advanced economies, on the other hand, rose by just 0.5% to 0.9% a year between 2000 and 2008, says the McKinsey Global Institute. In manufacturing, the financial crisis actually reduced pay: real wages in American manufacturing have declined by 2.2% since 2005.
By contrast, pay and benefits for the average Chinese factory worker rose by 10% a year between 2000 and 2005 and speeded up to 19% a year between 2005 and 2010, according to BCG. The Chinese government has set a target for annual increases in the minimum wage of 13% until 2015. Strikes are becoming more frequent, and when they happen, says one executive, the government often tells the plant manager to meet workers’ demands immediately. Following labour unrest, wages at some factories have gone up steeply. Honda, a Japanese carmaker, gave its Chinese workers a 47% pay rise after strikes in 2010. Foxconn Technology Group, a subsidiary of Hon Hai Precision Industries, a Taiwanese firm that does a lot of manufacturing for Apple and other big technology firms, doubled pay at its factory complex in Shenzhen after a series of suicides. Its labour troubles are still continuing.
The pushmi…
BCG used to argue that companies unwilling to send their manufacturing to lower-cost countries were putting their very future in jeopardy. Now it says that companies will bring manufacturing back to America from China. As soon as 2015, says Hal Sirkin, a consultant at the firm, it will cost about the same to manufacture goods for the American market in certain parts of America as in China in many industries, including computers and electronics, machinery, appliances, electrical equipment and furniture. That calculation takes into account a wide variety of direct costs, including labour, property and transport, as well as indirect ones such as supply-chain risk.
After decades of complaining about American and European workers’ high pay, cushy conditions and unreasonable expectations, businesspeople now increasingly moan about Chinese workers. Their aspirations are rising and they are less willing to work long hours in boring factory jobs. A new labour law introduced in 2008 brought in more protection for workers, including the right to a permanent contract after a year of emp loyment, and workers are more aware of their rights. One consultant jokes that it is getting as hard to fire people in China as in France.
“China’s labour market is so overstretched that all the high-quality labour has been exhausted, you have to hire people with lesser qualifications, and then quality becomes a problem,” says Alain Deurwaerder, who until recently ran a factory in Thailand for Ducati, an Italian motorbike-maker. Another European chief executive complains about the flightiness of his Chinese workforce: “If someone on the other side of the road offers 5% more pay, they go.”
Lorne Schaefer, the owner of Jenlo Apparel Manufacturing, a Canadian-owned clothing company, opened a factory in Liuzhou in southern China in 2008 because he could no longer find workers at home; second-generation Chinese and Vietnamese immigrants in Montreal, he says, no longer want to work in the industry. Now he is having similar problems in China. The latest generation of workers, thin on the ground because of the country’s one-child policy, are not keen to toil in factories, nor do they want to work for companies that make goods for export, since the quality standards are far higher than for domestic consumption. So even in a labour-intensive industry such as textiles, the cost benefit that China offers is quickly eroding.
“Pay for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds pay in America and Europe”
Higher labour costs alone are not enough to prompt companies to leave China. The country has the world’s best supply chains of components for industry and its infrastructure works well. Firms have already invested heavily in being there. And companies that initially came for the low labour costs now want to stay because it has become a huge market in its own right. Nonetheless, “the incremental decision to invest in new production capacity in China has become tricky,” says Gordon Orr, Asia chairman for McKinsey.
One answer is to invest in other low-cost countries, of which there is no shortage. Myanmar, for instance, is attracting interest now that the West is lifting economic sanctions. But the scale, skill and productivity of the labour force there, and in countries such as Vietnam and Cambodia, nowhere near matches China’s, argues Mr Sirkin. And workers in those countries, too, are demanding better pay and rights.
Mexico, which has the huge advantage of bordering the United States, is increasingly attracting production destined for the Americas that would formerly have gone to China. Average pay for Mexican manufacturing workers is now only slightly higher than for Chinese ones, and the time it takes for goods to travel to North America is measured in days not months. Some firms, such as Chrysler, a car company, are even using Mexico as a base to supply the Chinese market. The country has become an important production hub for the aerospace industry. But Mexico’s poor infrastructure and highly publicised drugs-related violence may deter some firms.
Even as pay is rising rapidly in China, costs in America are falling. The successful extraction of natural gas from shale has dramatically lowered the price of energy. PricewaterhouseCoopers, an accountancy firm, reckons that these lower American energy prices could result in 1m more manufacturing jobs as firms build new factories. Companies such as Dow Chemical, a speciality chemicals firm, and Vallourec, a French steel-tubes firm, have announced new investments in America to take advantage of low gas prices and to supply extraction equipment.
…and the pullyu
Not only have American wages declined or are rising only slightly, BCG points out, but the dollar has been weakening. The workforce is becoming more flexible and productivity continues to rise. High unemployment has brought a willingness to work for lower pay, especially in southern states. These are mostly “right to work” states where individuals are free to decide whether to give financial support to a trade union, so unions are less powerful there. The very threat that jobs will be outsourced will also have played a role in keeping wages down.
Alabama, one such state, received a big boost last year when Airbus, a European aeroplane manufacturer, said it would open a big new factory. Airbus also plans to expand its production in Asia beyond its main factory in Tianjin, China, to be close to fast-growing new markets. Fabrice Brégier, the firm’s chief executive, says that for skilled workers, “China is no longer a low-cost country.”
Big unions in America have sometimes been willing to let wages fall to keep jobs at home. In 2007 the United Auto Workers union (UAW) accepted a two-tier wage structure under which some new blue-collar workers are paid only half as much as longer-serving ones. In 2011, after the government had bailed out part of the motor industry, the Big Three carmakers employed more second-tier workers, reducing their overall labour costs. Ford has brought back production from China and Mexico to Ohio and Michigan, thanks to a new agreement with the UAW.
As the example of ET Water Systems showed, transport costs are playing a big part in reshoring. Rising shipping, rail and road costs are most damaging for companies that make goods with relatively low “value-density”, such as consumer goods, appliances and furniture, according to a recent McKinsey report on global manufacturing. That makes reshoring or nearshoring more attractive. Emerson, an electrical-equipment maker, has moved factories from Asia to Mexico and North America to be closer to its customers. IKEA, a Swedish firm that makes products for the home, has opened its first factory in North America as a way to cut delivery costs, and Desa, a power-tools firm, has returned production from China to America because savings on transport and raw materials offset the higher labour costs.
In the longer term reshoring will be boosted by the use of advanced manufacturing techniques that promise to alter the economics of production, making it a far less labour-intensive process. 3-D printing, a process in which individual machines build products by depositing layer upon layer of material, is already being used in research departments and factories. Disney is developing 3-D printed lighting for interactive toys, and says that in future the interactive devices inside such toys may be printed rather than assembled by hand. Additive manufacturing machines can be left alone to print day and night. For now they are used mainly for prototyping and for complex parts, but in future they will increasingly make final products too.
Robots are already making a difference to the share of labour in total costs. Cheaper, more user-friendly and more dextrous robots are currently spreading into factories around the world, and they cost just the same in America as they do in China. Relative to the cost of labour, average robot prices since 1990 have fallen by 40-50% in many advanced economies, according to McKinsey. Baxter, a new generation of robot made by Rethink Robotics, an American firm, costs $22,000 apiece and is so safe and simple that it can be taught by an unskilled worker and operate right next to real people.
Baxter and his like may mean there will be fewer manufacturing jobs overall, but those that remain can stay close to a firm’s domestic headquarters. And even if the manufacturing activity itself does not employ many people, the supply chains that spring up around it will create new work.
Getting the word out about manufacturing
in Uncategorized/by MAM TeamForum focuses the economic, educational need to focus on advanced manufacturing.
That was the consensus at a recent NH Works workforce development forum at New Hampshire Technical Institute in Concord. Staff from the Office of Workforce Opportunity and the New Hampshire Department of Employment Security joined representatives from vocational rehabilitation, adult education, veterans support and other state agencies for the daylong event.
During a forum led by Ross Gittell, chancellor of the Community College System of New Hampshire and an economist, advanced manufacturing was the topic of choice.
And now, said Gittell, “Employment is stabilizing and growth opportunities for manufacturers are adding up. This presents an exciting opportunity.”
Poised for growth, manufacturers need more technically skilled workers, and under a Department of Labor grant, CCSNH has partnered with businesses and state agencies to form the Advanced Manufacturing Partnerships in Education initiative.
“It takes a partnership approach between state, education and industry to build the workforce and create well-paying jobs,” Gittell said. Under the grant, “we met with manufacturers and asked them what they needed. We’ve been hard at work at all our colleges to build an advanced manufacturing curriculum with a focus on specialized industry sector training.” With e-learning, hybrid and common core courses, CCSNH is building stronger and higher capacity training programs, he said.
Curricula were designed with the guidance of more than 100 business and industry partners, and the consortium aims to touch thousands of students and add as many jobs in the state, he said.
All told, numbers from a 2011 Smart Manufacturing High Technology study by the Center for Public Policy Studies show that, if the initiative reaches its full potential, it could have a positive economic impact measured in the billions of dollars in New Hampshire alone.
“We are well-positioned for success,” Gittell said
‘Vision and direction’
Key to that success is the partnership the colleges and business leaders share with agencies like DRED, OWO, NHES and NH Works, which support both businesses and job-seekers by helping to them with training opportunities, he said.
While large “anchor” industry partners are essential to the advanced manufacturing initiative, Gittell said, 96 percent of businesses in New Hampshire are small businesses. That means options like the Job Training Fund can give high-tech companies a boost as they work with current and prospective employees to update skills.
Aid is also available through the Workforce Investment Act, an employment and training program funded by the U.S. Labor Department to help dislocated workers and other eligible adults and to help companies find skilled workers.
“To sustain ourselves, we need vision and direction, partnerships and skill-set development,” said Department or Resources and Economic Development Commissioner Jeff Rose. “Aligning education and training programs to industry needs is very important. We do have the vision of how we want the workforce to look, based on industry need, and state agencies are looking forward to working with you.”
State Sen. Molly Kelly, D-Keene, called growing the economy through advanced manufacturing “one of her favorite subjects.”
“What I see is not the kind of memory I had of manufacturing,” she said. “These places are incredible. The precision is fascinating; the things we’re making are works of art. Our workers are very good – and they are making very good livings. But I don’t think that is the common perception.”
For example, she said, many people aren’t aware of the need for science, technology, engineering and math-skilled employees, and they are shocked to see the clean, high-tech environments in which those employees work. She herself was surprised when, in 2008 as the nation’s economy reeled, New Hampshire manufacturers were telling her, “We have jobs. We don’t have skilled workers.”
That’s the focus of the state Advanced Manufacturing Education Advisory Council, she said. “We step outside of our silos. Educators know education and manufacturers know what they need to grow.”
This article appears in the July 12 2013 issue of New Hampshire Business Review
Reshoring: When Jobs Come Back Home
in Uncategorized/by MAM TeamSometime during the past decade, when most everyone was focused on inflating the housing bubble, I was called into a senior manager’s office. My employer was planning to move an assembly line to Mexico and thought I would be a great manager for the project. As the executive discussed the importance of the move, my thoughts wandered to Thanksgiving.
Although a city boy, I grew up with tractors. I played with scale models as a child, spent weekends on my grandfather’s farm and drove tractors long before I could legally drive a car.
My grandfather, dad and uncles farmed, built or repaired tractors. I loved to listen at family gatherings as they debated their politics — not of red and blue states but red and green tractors.
So when I graduated from engineering school, it was only natural for me to choose a supplier to the tractor industry. How I enjoyed contributing to those conversations.
“What are you working on now Rick?”
I would explain the latest technical advances, being careful not to violate customer confidentiality agreements. This would spark spirited conversation on the usefulness (or lack thereof) of the new features to farmers and the challenges to servicing the new features to mechanics.
Now, as the boss rambled, I could only envision the ensuing conversation:
“What are you working on now Rick?”
“Well, I’m managing the move of a major product line to Mexico.”
(Silence, followed by more silence)
“I believe the turkey is a little dry this year.”
I quickly told the boss that I wasn’t interested in spearheading the move.
So I’ve been more than a little pleased and interested as I follow the trend of manufacturing work moving back to the U.S. Known as reshoring, the development is so new that my word processing software doesn’t recognize the term.
While my motivation was primarily patriotic, that’s not industry’s driver. It’s simply making good business sense. Some of the primary reasons include:
* Shorter and predictable supply chains — the price on the invoice doesn’t matter when the product has to be air freighted due to changing customer demands or is stuck in a port due to a dock workers’ strike.
* Lessons learned regarding the criticalness for manufacturing and engineering to communicate when the product is more complex than a coat hanger.
* More lessons learned regarding the complexity of communicating, instilling quality systems and even ensuring protection of intellectual property when multiple tiers of suppliers are involved, with each subsequent layer becoming less sophisticated.
* Multiple years of double-digit wage increases in China, supported by government’s hopes of growing the middle class, narrowed the cost gap.
As a Lean advocate and former engineering manager, I foresaw the first three reasons. The fourth caught me completely off-guard. I reasoned that the sheer population of China would absorb wealth for generations before it materially impacted competitiveness. But the majority of the country lacks the basic infrastructure to take advantage of that population.
There’s one more important driver for reshoring. U.S. productivity continues to grow. We’re 20 percent more productive than we were 10 years ago, despite the fact the time span has been largely defined by tepid demand growth. Productivity always looks best in periods of high demand.
Therein lies the caveat with reshoring efforts. The work that is returning is not especially labor intensive, or at least not low-skills labor. The returning work values the top three reasons stated above — speed and agility, technical communication, and quality and protection of intellectual property.
The good news is that the jobs created by reshoring efforts, although not equal in number to those that originally left with it, are decent jobs. They rely on folks using their noggins more than their backs.
Oh, the rest of story regarding my personal outsourcing “opportunity?” The housing bubble burst, the Great Recession ensued and today that assembly line productively resides in central Iowa. And I can still attend and enjoy family reunions.