It’s interesting to see stories such as that of Generac Power Systems. In 2001, the company shifted production from Wisconsin to China because companies there could make a key component for $100 per unit less than was possible in Wisconsin.
Now, however, Generac has brought manufacturing of that component back to its Whitewater, Wis. plant, an article in the LA Times reports. That change came about after company leaders realized that what began as a $100 difference in the cost of producing an alternator in China, narrowed considerably as the Chinese yuan jumped in value and Chinese wages and other costs soared. The tipping point finally came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant, executives said in the LA Times article.
Today, the company can produce an alternator in the U.S. using one worker in the same amount of time it took four workers in China. Although there’s still a small price difference, Generac execs believe having greater control over product delivery makes up the difference.
That example shows how the tide has turned to a certain extent, or at least it’s starting to turn, and companies are re-shoring to the U.S. There are several factors at play. For example, there is a significant U.S. energy-cost advantage, driven largely by the 50 percent drop in natural-gas prices since large-scale production of U.S. shale gas in 2005, contrasted with rising energy costs in China. U.S. manufacturers also have growing concerns about a seeming lack of quality control in manufacturing facilities in China.
Labor costs though, are the most significant factor. Harry Moser, founder of the Reshoring Initiative, a nonprofit that works with companies to bring manufacturing jobs back to the U.S., has said that Chinese wages have been rising by about 15 percent to 18 percent per year, compounded since about 2000. Consequently, the labor cost/unit of output in China is now roughly three times what it was in 2000, he says. That means for some products, offshoring so-called “hidden costs”—duty, freight, packaging, carrying cost of inventory and innovation impact of separating engineering and manufacturing—are now enough to overcome the manufacturing cost gap between Chinese labor and U.S. labor, he says.
Nonetheless, re-shoring isn’t a simple process and it doesn’t always go smoothly. Indeed, United Technologies Corp. provides a cautionary tale in in a MarketWatch on-line story on the Wall Street Journal. As the story explains, the company’s move to relocate an Otis elevator plant from Mexico to South Carolina in late 2012 was expected to save money and help fill orders faster by having design engineers and production workers in the same building. Furthermore, since more than 70 percent of Otis’ customers in the U.S. and Canada are east of the Mississippi River, company executives told The Wall Street Journal in the fall of 2011 that the relocation would lower the company’s freight and logistics costs by 17 percent.
But the moves didn’t quite work out as planned, and company executives now say the company tried to do too much at once. In addition to moving the plant, the company consolidated products and implemented an enterprise business system. Adding to the complexity, Otis closed two other U.S. facilities, in Arizona and Indiana, and transferred those workers to South Carolina.
Resulting production delays created a backlog of overdue elevators. Some customers canceled their orders after being left waiting months, people in the elevator industry say, the MarketWatch article reports. What’s more, the plant Otis was leaving behind in Nogales, Mexico, had to stay open for half a year beyond its planned closing date to deal with the backlog. While Otis has resolved the bulk of the problems and is working through the order backlog, the delays cost United Technologies $60 million last year and will continue to weigh on earnings through the first half of 2014, the company notes in the article.
“I think we failed on both the planning and the execution side,” Robert McDonough, chief operating officer for the United Technologies unit that includes Otis, told analysts in March.
Has your company moved any operations back to the U.S.? If so, how did it go?