Made in USA (Again): Why Manufacturing Is Coming Home
Mismanaged supply chain decisions sent manufacturing overseas. But the industry has changed direction.
Courtesy Company
Returning to America: Zentech Manufacturing, a contract manufacturer based in Baltimore, is seeing more and more companies return their manufacturing to America.
Susan Walsh/Associated Press
The Reshoring Initiative Founder Harry Moser, right, speaks during a panel discussion with small and large business experts at the White House.
When Anton Bakker launched his company, Offsite Networks, in 1999, he had no intention of manufacturing overseas. But a few years later, when his company began taking on larger orders, he began looking for cheaper supply alternatives.
That's when he went to China.
By the early 2000s, Chinese contract manufacturers had become increasingly equipped to handle the type of advanced manufacturing that Offsite was producing—point-of-sale hardware for store loyalty programs, like high-tech printers and scanners. So in 2004, the company, which is based in Norfolk, Virgnia, canceled contracts with domestic suppliers and moved 90 percent of its manufacturing to suppliers based in China, Malaysia, and Tokyo. For the most part, Bakker was satisfied.
"The scale drove us to look for more competitive, cost-effective products," Bakker says. "I had a difficult time doing that domestically. We found that the products were just not competitive in terms of pricing, and we could find them at less than half the price overseas."
That narrative—of outsourcing, offshoring, and finding cheaper suppliers overseas—is not a new story.
But then something unexpected happened. In 2011, Offsite Networks moved their manufacturing back to America, finding a domestic supplier, Zentech Manufacturing, based in Baltimore, to carry out the company's orders.
- See the slideshow: 6 Companies That Came Home
So what changed?
Bakker tells me the company returned for a variety of reasons. It was becoming more affordable to manufacture locally, he says, and American technology had improved rapidly. This meant that labor costs, which had initially driven Bakker to find cheap work overseas, were a smaller percentage of total costs. Meanwhile, an increase in other costs—like shipping, for instance—had increased. In other words, it was cheaper to manufacture locally.
The interesting part is that Bakker is hardly alone. The trend of reshoring—or American companies returning to America—is beginning to gain steam.
Last month, Boston Consulting Group studied the phenomenon. The authors of the study pointed to increases in Chinese wages and shipping costs.
"Things have changed," Bakker says, noting that the company will do about $10 million in revenue in 2012. "It was painful that we had to go overseas and then come back, but all it kind of worked out," he says.
Matt Turpin, the founder of Zentech Manufacturing, the Baltimore contract manufacturer that Bakker enlisted to build his company's product, says he's seen a growing number of customers that have been burned by outsourcing.
"More and more we're seeing people complaining about their offshore experiences," he says. "We've had a number of customers recently that were in Asia [come back.]"
So What's Happening?
Though they're not often publicized, it's easy to find examples of more and more companies returning to the United States within the last year. Peerless Industries, a United States-based maker of audio-visual mounting solutions, recently moved back to Illinois. Outdoor Greatroom, which makes outdoor furniture, moved its manufacturing back to Eagan, Minnesota. Otis Elevator Company has returned to South Carolina, Buck Knives came back to Idaho, Karen Kane relocated to Southern California, G.E. opened a new plant in Kentucky, Caterpillar reshored to Texas, and Coleman has moved back to Kansas. The list goes on.
When I ask Harry Moser--founder of The Reshoring Initiative, a group promoting the return of American manufacturing--about the reshoring phenomenon, he laughs.
"You know, that's the very question President Obama asked me just a few weeks ago," he says.
Moser was recently invited to take part in Obama's "insourcing" initiative, which encourages American companies to manufacture locally. Essentially, this is what Moser told Obama: The costs of going overseas have been wildly underestimated, and American firms are beginning to realize that the total cost of going abroad don't justify offshoring in the first place.
"Looking only at only price, which is what most companies do, all the work would stay offshore," says Moser. "But if you looked at total cost of ownership, that's no longer true."
Of course, outsourcing and offshoring are not dead. Though there's scant data to illustrate the trend, Moser estimates that even if offshoring is still growing, it's begun to grow at a slower rate. At the same time, the rate of reshoring is picking up pace.
"If it's a trickle, it's a trickle that that’s headed to become a stream," he says.
Reasons for the Return
Moser believes the main problem of offshoring—and one of the reasons that manufacturing is returning—is because costs of going overseas have been profoundly miscalculated for decades. Supply chain managers have long postulated that lower labor costs abroad, especially in China, have been enough reason to justify outsourcing. But improvements in automation in the last few years mean that labor costs are becoming a much smaller percentage of the overall cost of most products.
"What used to be done in 50 parts is done with one part," explains Matt Turpin, the president of Zentech. "And the automation within the assembly area has grown by leaps and bounds. It's light years ahead. So now, when you compare the U.S. to Asia, if your raw materials cost the same, if your cost to buy the automation equipment is the same, if your cost to finance the capital is the same, and your labor is down to 5 minutes or 10 minutes,” well, then, you may as well manufacture here.
Massive Miscalculations?
Recently, manufacturing analysts have begun to echo Moser's claims. In one Accenture study last year of 287 manufacturing executives across a variety of industries, the researchers noted a significant underestimation of overseas manufacturing costs.
"Our study found ... that many manufacturers who had offshored their operations likely did so without a complete understanding of the 'total costs,' and thus, the total cost of offshoring was considerably higher than initially thought," concluded John Ferreira and Mike Heilala, authors of the report. "Part of the issue is that not all costs of offshoring roll up directly to manufacturing; rather, they impact many areas of the enterprise."
