Companies bringing production back to US see bottom-line and top-line gains.
The vagueness of Tesla Motors’ recent announcement that it plans to invest $2 billion over the next three years in a plant somewhere in the Southwest to build less expensive batteries, with unnamed partners putting up as much as $3 billion, may be a luxury for only a cutting edge, Wall Street darling. The decision to locate production in the US, however, is snowballing across a wide range of multinational companies.
The “gigafactory,” which CEO Elon Musk explained takes raw materials and converts them under one roof into finished products, will be powered by solar and wind, making the Southwest ideal. A slew of other factors are prompting companies in a variety of industries—likely including Tesla, which did not respond to queries—to move production back to the US from China and other developing countries. Ultimately, this could free up a little bandwidth for treasurers, who during the offshoring craze took on the added responsibility of functions such as valuation reviews, legal entity control and tax issues.
“Manufacturing is coming back to the US, and it’s coming back faster than we thought. Back in 2011, no one thought we would see anything until 2015,” said a labor economist participating in PriceWaterhouseCoopers,’ “Emerging Trends in Real Estate 2014” study.
The study goes on to note factories opening up in “surprising locations” and “some unexpected industries.” Semiconductors have long been a product thought lost to Taiwan and mainland China. However, the study notes a semi-conductor manufacturer announcing last year the development a facility in Saratoga, N.Y., to support technology development and manufacturing activities—likely alluding to Global Foundries’ $2 billion research and development center supporting its multi-billion-dollar manufacturing plant that began operations in 2012.
The study also notes a computer assembly plant beginning operations last year in Whitsett, NC, a clear if unnamed reference to Chinese manufacturer Lenovo. The company acknowledged it remains less costly to assemble the products in China but praised the speed and flexibility stemming from putting the final product together close to the customer base.
Other technology giants including Apple and Google have publicly noted the benefits of manufacturing in the US. And less high-tech-oriented companies, including Whirlpool, Dow Chemicals, Dazor Manufacturing, Chesapeake Bay Candle and Armstrong World Industries, have all recently re-established production in the US or plan to soon.
Some of the reasons for re-shoring are straightforward. Wages in China continue to increase at 15 percent to 20 percent a year, a pace that in 2011, Boston Consulting Group (BCG) estimated would result in net labor costs for manufacturing in China and the US to converge by 2015. BCG added that after accounting for American workers higher productivity, wages is China’s highly industrial regions would be only about 30 percent less than in the US. And since wages account for as much as a third of a product’s total manufacturing costs, production in China would be only 10 percent to 15 percent cheaper, before inventory and shipping costs are even considered.
Wages and higher transportation are relatively easy costs to measure. The acceleration in re-shoring, however, has been driven by several other, often more complex factors that were difficult to measure in the early 2000s, when offshoring production exploded.
“Companies are looking at the total landed cost more than ever before,” said Kelly Marchese, a principal with Deloitte Consulting and a specialist in supply chains and manufacturing.
Ms. Marchese added that when companies first looked at offshoring, they considered direct costs they could measure, while indirect costs arising in areas such as supply-chain disruptions, impact on brands, and intellectual property theft were difficult to quantify, largely because there was little offshoring experience to analyze.
“Now companies do have that history; they had to be in China for a period of time to realize the impact,” Ms. Marchese said. “The trend was to go to the lowest cost labor source, but companies are finding that [benefit] only lasts for a little while and then they have to hop countries, and that creates complexity and disruptions.”
In a survey of 600 corporate executives last year, Deloitte found high anxiety over the highly complex supply chains that have developed over the years. More than half the executives, especially from technology, industrial product and diversified manufacturing companies, said supply chain disruptions have become more costly over the last three years. Consumer products, diversified manufacturing and energy companies were strongly represented among the 53 percent of respondents reporting margin erosion as one of their most costly supply chain-related issues. And 40 percent of executives, especially at technology and retail companies, reported the long supply chains slowing their ability to meet changing customer demand as one of their two most costly problems.
Perhaps scariest of all, 45 percent of respondents said their programs to manage supply-chain risk were ineffective or only somewhat effective.
Ms. Marchese said skyrocketing fuel costs in 2008 triggered corporates’ initial reassessments of offshoring. At that time, however, the supply chain infrastructure in the US was traumatized by the financial crisis, which caused numerous suppliers to declare bankruptcy. Ms. Marchese said that’s largely worked itself out, and today’s infrastructure comprises highly cost-competitive companies that survived the Great Recession and financial crisis. Today, she said, companies are considering whether to onshore or not when they discuss new product life cycles, since improving products or launching new ones provides the opportunity to reassess suppliers and potentially make a transition.
Novato, CA-headquartered ETwater has sold “smart” irrigation systems since 2005 that enable users to customize the level of irrigation according to the types of plants and topography in a specific zone and automatically adjust that level according to recent and forecast weather. Before Pat McIntyre and Mark Mr. Coopersmith took over in 2010, respectively as chairman and CEO, and managing director, the company sourced its products through Asian manufacturing partners. Still a relatively small company, however, the size of orders required to make them economical left ETwater with three to six months of inventory, which tied up capital and slowed technological innovation and product updates.
“The other thing we looked at was, “How can we use our capital as efficiently as possible,” said Mr. Coopersmith.
He added that using foreign manufacturers involves multiple steps, including setting up letters of credit and often making partial upfront payments, and shipping, customs and duties, that all add up. “When we asked how many days out until before we can sell the product and collect on our receivables, we found quite a gap,” Mr. Coopersmith said.
Funding that gap ties up working capital, so ETwater turned to a domestic manufacturer, General Electronics Assembly (GEA), in nearby Santa Clara Valley. “After we re-shored and made arrangements with our current production partner, we reduced our net working capital to close to zero,” Mr. Coopersmith said.
Using GEA has not only allowed the company to match up billings and receivables more closely, it has enabled the irrigation company’s engineering team to work alongside the manufacturer, even allowing them to view various configurations on the production line. GEA completes the final configuration and ships the customized products to customers, reducing the number of times ETwater “touches” the product; for example, ETwater no longer has to upgrade software that had become outdated before shipping the product to customers. In addition, GEA works with other customers whose products require military-grade specifications, and when appropriate it has shared those techniques with ETwater, whose irrigation systems must withstand rugged environments. That kind of interaction simply didn’t exist with its overseas manufacturer.
Mr. Coopersmith said his company had read the BCG study, and instead calculated costs to manufacture in the US to be a lower 7 percent to 10 percent higher. Then after adding in costs related to transportation and inventory, and lower costs resulting from improved quality and fewer customers exercising warranties, “that flipped it to being a positive equation for us from day one,” he said.
Other companies’ deliberations on where to produce their goods have arrived at similar conclusions. Whirlpool announced in December that it was moving production of its commercial front-load washing machines from Monterrey, Mexico to Clyde Ohio, where it already operates a major plant. The company anticipates the relocation increasing operational efficiencies, and it aligns with Whirlpool’s strategy of building products in the regions where they are primarily sold.
“We continue to invest in the advanced manufacturing processes in our Clyde, Ohio plan where we have a highly skilled workforce, making this a smart, long-term business decision for us,” said Jeff Durham, vp of US manufacturing for Whirlpool.
A further allure for companies considering re-shoring is that many states are offering significant tax incentives, just as corporate taxes in China are increasing. In addition, major retailers such as Walmart have committed to purchasing billions of dollars of products “Made in America.”
While such benefits may be temporary, companies appear to be looking at longer-term financial benefits of onshoring, whether cost cutting to improve the bottom line, or being able to service customers more effectively and improve top-line revenues. Over the last few years ETwater has tripled its business, servicing major customers including Cisco, the UCLA campus and the California freeway system. In addition, said Mr. Coopersmith, margins have increased from single-digits to “very healthy double digits.”
Dave Sievers, strategy and operations practice leader at The Hackett Group, estimated the re-shoring trend is still in its early stages of a 15 to 20 year cycle. He said that China had enormous labor capacity at low cost, and multinationals flocked there to take advantage of that capacity, but now much of it has been absorbed. Meanwhile, US manufacturing has become highly productive and the fracking boom has resulted in energy costs that are the envy of the world.
“So now we’re seeing a more typical pattern of manufacturing allocation and investment that’s not driven by what was a very large, low cost option,” Mr. Sievers said, adding, “Europe has similar options available, but it is relatively less productive and has higher energy costs.”