Exposing the Myths About American Manufacturing
Don't ring the death knell yet.
Manufacturing is alive and well and living in America. For proof, look no further than Bayard Winthrop, a San Francisco-based entrepreneur who on February 1 is launching American Giant, a clothing brand whose garments are exclusively made in the United States, and are sold exclusively online. The collection itself isn't exactly cut for the runway—the line is composed of cotton sweatshirts, cardigans, and sweaters for men. But Winthrop's attitude about the state of U.S. manufacturing, and his dedication to it, is becoming a noteworthy trend among many American retailers.
"This idea that technological innovation is liberating the best of American manufacturing is a fascinating business idea," he says. "And it's one that has me really optimistic about the American manufacturing sector looking forward."
Over the past two years, the U.S. economy has created some 330,000 manufacturing jobs. Manufacturing production has increased by about 5.7 percent since June 2009—its fastest pace in a decade. At the same time, rising wages in China are making overseas manufacturing more expensive.
330,000: Manufacturing jobs created in U.S. in two years
5.7 percent: Increase in manufacturing production in U.S. since June 2009
Even President Obama is putting his chips behind American manufacturing. In his State of the Union address last month, the President urged businesses to consider manufacturing locally. "Tonight, I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last," the President said. "This blueprint begins with American manufacturing."
Better Quality Control and Quicker Turnaround
American Giant's office, which houses its 10 employees, is located on a busy street in the Castro District of San Francisco. Six miles south, in Brisbane, sits the company's contracted manufacturer, SFO Apparel, where American Giant has become their biggest client. Getting from the offices to the manufacturer is a breezy 15-minute drive along the San Francisco Bay that, Winthrop says, is perhaps the company's greatest asset. Why?
Beyond the brand value that comes with a "Made in America" tag, keeping American Giant local gives Winthrop more creative control, better quality control, and faster manufacturing cycles.
It's also, he believes, cheaper than it ever was.
For more on this, check out How American Giant
Hacked the Supply Chain.
He offers an example. Say you're working with a manufacturer in Shenzhen, China, and you've just ordered 15,000 garments that will arrive by boat. You have someone overseeing production, but he makes a slight mistake.
"When the shipment comes, you realize 'Oh crap, once we wash these things the threading frays.' What do you do about that?"
There are a few options, he says. None of them are good. A company can either go to market with an inferior product and hope the customer doesn't notice, or your company can do a secondary rush job to reinforce the stitching. The third option, equally unattractive, is to send the product back and lose 90 to 120 days in time to market, which is enormously expensive.
By keeping it local, Winthrop avoids the anxiety—and the potential downside of mismanaged product.
"We not only have members of our own staff down there watching stuff getting made and coming off the line, but if we see things that we're less than happy with, you can adjust on the fly," he says.
It's a lesson learned from companies such as Zara, which can design and distribute a garment to market in fifteen days. Time is money.
Local manufacturers are also much, much faster. When working with a manufacturer overseas, a brand will have to make a purchase decision about 18 months in advance. For clothing retailers, having to make that decision is nearly impossible. Not only does manufacturing locally cut down the buy cycle to about four to six weeks, but it allows Winthrop the opportunity to restock on products that are selling exceptionally well, and avoid any inventory shortages. It's a lesson learned from companies such as Zara, which can design and distribute a garment to market in fifteen days. Time is money.
"I can drive down to SFO tomorrow and say, 'Hey, the crew-neck is really selling much better than we thought so let's get more on the line.' I can be back in stock in a week and not in 30 or 60 days," he says.
Saving the Soft Costs of Going Abroad
Winthrop acknowledges that manufacturing locally is ideal for most entrepreneurs, but entrepreneurs often believe it's too expensive. After all, labor wages and materials prices are higher in the United States. But there are other costs of going abroad—the soft costs—that Winthrop believes are too often underestimated by retailers.
"A lot of my peers in the manufacturing world understand inherently the benefit of making stuff close versus far away," Winthrop says. "I don't think there's anything that's unclear to people. But navigating the cost-benefit analysis has been more complicated historically."
Bill Waddell, a manufacturing consultant and author of Rebirth of American Industry, agrees. Soft costs, he says, are "terribly underestimated by American retailers."
Waddell explains that when most companies do their yearly cost benefit analyses, they focus too highly on labor and material costs (because they're easy to trace to the product) but they do a lousy job of taking into account all overhead costs—like setting up the facilities, travel, and executive pay.
"For most companies, overhead is responsible for up to 600 percent of labor," he says. "That's where all the money is. When you look at direct labor, it's actually a very small percentage of the total cost. But all of our accounting systems and measurement systems and what they teach in school has got this labor-centered approach to manufacturing management that is not only misleading, but downright destructive. It leads companies to do dumb things."
For years, manufacturing overseas relied on this assumption—whether true or not—that it was cheaper to manufacturer abroad where overseas workers, particularly the Chinese, were generally willing to work for less. That's still true now, but to a diminishing degree.
Last month, The Boston Consulting Group released a report titled "Made in America, Again," which predicts the resurrection of the American manufacturing industry by 2015. In it, the authors conclude that the manufacturing economy in China is maturing, and workers are demanding more. Wage and benefit increases have surged 15 to 20 percent per year at the average Chinese factory.
This comes at a time when American wages are languishing, making them cheaper to employ. Specifically, the report cites a combination of economic forces that is "fast eroding China's cost advantage as an export platform for the North American marker."
This change is forcing retailers to confront a new reality: it's just not that cheap to have stuff made in China anymore.
For years, the U.S. maintained a labor-cost advantage of up to 50 percent compared to low-cost states. But because of the wage-rate increase, the report concludes that the savings gained from outsourcing to China "will drop to single digits for many products" by 2015. This change is forcing retailers to confront a new reality: it's just not that cheap to have stuff made in China anymore.
Other factors cited by the report, including increased shipping costs, diminishing levels of productivity, and the limits of automation are contributing to what the report calls "U.S. manufacturing renaissance."
"This reallocation of global manufacturing is in its very early phases," the report notes. "It will vary dramatically from industry to industry…But we believe that it will become more pronounced over the next five years, especially as companies face decisions about where to add future capacity. While China will remain an important manufacturing platform for Asia and Europe, the U.S. will become increasingly attractive for the production of many goods sold to consumers in North America."
Plenty of companies are fine-tuning their cost-benefit analyses, and coming away with the same answer, notes Waddell.
For example, the BCG report highlights several recent examples of U.S. companies moving jobs back to American manufacturers. They include the Coleman Company moving its production of plastic coolers back to Kansas, Sleek Audio moving its headphone manufacturing back to Florida, and Peerless Industries, which makes audio-visual mounting systems, back to Illinois.
"Some have just decided to come back to the U.S., while others are going to Mexico," says Waddell. "Our key in this country, is if they're leaving China, get them to come back here. Don't let them run off to the next cheap place."
How to Bring Manufacturing Home
Although the tide may be beginning to turn for local manufacturing, the situation for American manufacturers is still far from ideal. Currently, there are two major problems that American manufacturers confront on a daily basis: currency manipulation, and a lack of qualified American workers.
Currency manipulation has been around for years. From 2008 to 2010, for example, China had pegged the yuan to the dollar, which kept its value artificially low. It also made Chinese exports cheap for American companies, who assemble—not manufacture—their products domestically.
On one side, Waddell explains, are large corporations such as Whirlpool that outsource their material manufacturing to China, as well as the banks that invest in these companies. These groups have strong lobbies in Washington, which have prevented any major legislation from passing through.
"All of those components are made in China, so anything that makes China less competitive hurts them," he says
The other side, of course, are small and medium-sized manufacturing plants that see clients finding cheaper materials overseas. Legislation—some as recent as October 2011—has been introduced to combat currency manipulation, but politicians have largely stalled on the subject.
"The Obama administration keeps talking about how they're going to get tougher on China," Waddell says. "And the Republicans said they're going to get tough on China too. But we'll see of push comes to shove if any are actually willing to get tough on China."
The other major problem is a shortage of talent for American manufacturers. Plants have become more technologically advanced, and necessitate some vocational school training. Waddell points out that it's becoming more and more difficult to find a pool of workers that are qualified to work around machines—and interested in doing it. It's a point echoed by the The Alliance for American Manufacturing, a non-profit that lobbies for American manufacturing.
"We need an educational system that does not warehouse kids who want vocational careers," writes executive director Scott Paul. "We need our business schools to teach managers how to "reshore" work rather than follow the race to the bottom."
Could e-Commerce Change the Big Picture?
Winthrop believes the Web is an intricate part of the puzzle. Because the internet enables a direct-to-consumer model, it has the potential to cut out expensive parts of the supply chain.
"There's a general growing comfort level with not only consuming online but buying things like shoes and apparel online," he says. "It's changing people's preconceived notions about how you make things in the U.S. We obviously believe that that's going to get increasingly acute in the apparel industry."
He adds: "I'm not sure that that that realization is dawning on a lot of people in the manufacturing side of things, whether they understand that 'Wow, there really is this moment that's happening where we can begin to tip the scales.'"