C&B Notes

Back To The Future

We have recently written about how rising wages in the East have made Mexico more competitive for manufacturing.  The U.S. also stands to benefit.  China’s huge labor advantage over the past 25 years overwhelmed many other cost and quality considerations, such as delivery delays, higher transportation costs, questionable intellectual property protections, lower worker productivity, government risk, etc.  With the closing wage gap, cheap natural gas in North America, and 25 years of experience to help better quantify the costs of these other considerations, large manufacturers are selectively bringing the production of certain goods stateside.  For example, GE is “re-insourcing” some of its higher-end appliance manufacturing:

By 1955, Appliance Park employed 16,000 workers. By the 1960s, the sixth building had been built, the union workforce was turning out 60,000 appliances a week, and the complex was powering the explosion of the U.S. consumer economy.  The arc that followed is familiar.  Employment kept rising through the ’60s, but it peaked at 23,000 in 1973, 20 years after the facility first opened.  By 1984, Appliance Park had fewer employees than it did in 1955. In the midst of labor battles in the early ’90s, GE’s iconic CEO, Jack Welch, suggested that it would be shuttered by 2003.  GE’s current CEO, Jeffrey Immelt, tried to sell the entire appliance business, including Appliance Park, in 2008, but as the economy nosed over, no one would take it.  In 2011, the number of time-card employees — the people who make the appliances — bottomed out at 1,863. By then, Appliance Park had been in decline for twice as long as it had been rising.

Yet this year, something curious and hopeful has begun to happen, something that cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers.  On February 10, Appliance Park opened an all-new assembly line in Building 2 — largely dormant for 14 years — to make cutting-edge, low-energy water heaters.  It was the first new assembly line at Appliance Park in 55 years — and the water heaters it began making had previously been made for GE in a Chinese contract factory.  On March 20, just 39 days later, Appliance Park opened a second new assembly line, this one in Building 5, to make new high-tech French-door refrigerators.  The top-end model can sense the size of the container you place beneath its purified-water spigot, and shuts the spigot off automatically when the container is full.  These refrigerators are the latest versions of a style that for years has been made in Mexico.  Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013.  Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States.  And Appliance Park already has new plastics-manufacturing facilities to make parts for these appliances, including simple items like the plastic-coated wire racks that go in the dishwashers.

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Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools.  After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products.  “The way we see it,” says Moser, “about 60 percent of the companies that offshored manufacturing didn’t really do the math.  They looked only at the labor rate — they didn’t look at the hidden costs.”  Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home.

“There was a herd mentality to the offshoring,” says John Shook, a manufacturing expert and the CEO of the Lean Enterprise Institute, in Cambridge, Massachusetts.  “And there was some bullshit.  But it was also the inability to see the total costs — the engineers in the U.S. and factory managers in China who can’t talk to each other; the management hours and money flying to Asia to find out why the quality they wanted wasn’t being delivered.  The cost of all that is huge.”  But many of those hidden costs come later.  In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation.  And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment.  “All you need is to have to hire one or two 747s a couple times to get product here in a hurry,” says Shook, “and you lose those savings.”

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The recalibration of costs in recent years is one reason, and the competitive benefit of keeping production stateside is another.  But the logic of onshoring today goes even further — and is driven, in part, by the newfound impatience of the product cycle itself.  Just a few years ago, the design of a new range or refrigerator was assumed to last seven years.  Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years.  This phenomenon is not limited to GE.  The feverish cycle of innovation and new products beloved in the electronics world has infected all kinds of consumer categories.  Products that once seemed mature — from stoves to greeting cards — are being reinvigorated with cheap computing technology. And the product life cycle is speeding up — many goods get outflanked by “smarter” versions every couple of years, or faster.  Factories take a while to settle into a new product, a new design.  They face a learning curve. But models that have a run of only a couple years become outdated just as the assembly line starts to hum.  That, too, makes using faraway factories challenging, even if they are cheap…. The addition of high-tech components to everyday items makes production more complicated, and that means U.S. production is more attractive, not just because manufacturers now have more proprietary technology to protect, but because American workers are more skilled, on average, than their Chinese counterparts.  And the short leap from one product generation to the next makes the alchemy among engineers, marketers, and factory workers all the more important.