The Insourcing Boom
December 5th, 2012Consider clicking through to read this one all the way through. I’ve excerpted some nuggets below, but it’s worth reading the whole thing.
This piece touches on a number of complex, interrelated issues. Parse it however you want, scoff at the Orwellian language that’s used to describe the crushing of labor unions, do the calculations on what factory workers earning $8 less per hour (in terms of constant dollar value) means, etc. The bottom line appears to be that GE (and other companies) are bringing manufacturing jobs back to the U.S.—with all the caveats, ifs ands and buts that you want to throw at it.
Probably the biggest caveat that’s not mentioned about this alleged insourcing boom is that some companies will be looking to gain the benefits of manufacturing in the U.S. but using robotic labor to do it. Hmm. And how about prison labor?
And when that asshole Immelt talks about not running a charity, that’s interesting. Indeed, I don’t know of any charities that have such an extensive laundry list of violations and fines listed in this Federal Contractor Misconduct database.
But enough of me pissing on the parade.
Via: The Atlantic:
After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. It is not alone. An exploration of the startling, sustainable, just-getting-started return of industry to the United States.
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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.
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Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013.
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In the midst of this revival, Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.” Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. “I don’t do that because I run a charity,” he said at a public event in September. “I do that because I think we can do it here and make more money.”
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Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
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GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
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Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers…Today… total time from factory to warehouse: 30 minutes.
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“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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GE is not alone in moving the manufacture of many of its products back to the U.S. The transformation under way at Appliance Park is mirrored in dozens of other places, with Whirlpool bringing mixer-making back from China to Ohio, Otis bringing elevator production back from Mexico to South Carolina, even Wham-O bringing Frisbee-molding back from China to California.
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If the people who design dishwashers sit at their desks in one building, and the people who sell them to retailers and consumers sit at their desks in another building, and the people who make the dishwashers are in a different country and speak a different language—you never realize that the four screws should disappear, let alone come up with a way they can. The story of the four disappearing screws on that dishwasher door is why Jeffrey Immelt has the confidence to spend $800 million to bring Appliance Park back to life.
Related: Some New iMacs Marked ‘Assembled in USA’
I keep just visualizing this as a gas problem in physics. We have a ‘container’ (a nation), with lots of neighbors (other nations). The pressure (wealth) inside each container varies, and the boundaries between the containers are more or less permeable.
As long as the membranes are permeable, the pressures inside the containers are going to equalize, give time. Make the membranes more permeable, (increase trade, reduce tariffs, remove other impediments to trade) and it will happen faster.
What does equalization mean? It means gradual movement towards equalization of standards of living. The US gets poorer, and its poorer trading partners get richer. This isn’t exactly a surprise.
Over the short term, A few of those positioned well in the richer countries get richer themselves by skimming off the flow of wealth to the poorer countries who are building up their manufacturing base. This is the great incentive behind outsourcing. If the management of a company can generate a forecast that appears to substantiate the claim that outsourcing will be profitable over what investors see as a reasonable period (often shorter than you would expect), then they will be able to make a large long-term investment of company resources in off-shoring with the fringe benefit of making individually-large investments in their own short-term bonuses. These bonuses are inevitably tied to near-term performance evaluations, which are easily satisfied because the actual impact of their decisions cannot yet be evaluated.
The idea that we may have hit ‘Peak Outsourcing’, and that companies will find it more profitable to build in the US does not seem that surprising.
How much is left to outsource anyways? You could make the argument that the last 30+ years of management have been busy burning through accumulated equity in pursuit of individual enrichment that was easily achieved simply by pursuing the conventional wisdom of offshoring production. But with the equity of of US-centric manufacturing base spent, management no longer has the option to make short-term cash by sending jobs overseas.
Moreover, with enough years of off-shored production on the ledger, it’s now a lot easier to see what the real aggregate costs are of overseas production. With the dollar down, and costs of transport steadily rising, it’s not surprising that manufacturing in the US looks better.
Bah. It’s hard to figure out how to write this without sounding like a pompous git.
tl;dr:
* liquidity is, well, liquid.
* auctioning all of someone else’s cows makes them think they’re rich this year, but results in their farm being broke the next. Meanwhile, you as the auctioneer make a tidy sum on the sale.
* manufacturing in the US sounds like a better deal because we’re relatively poorer than we used to be compared to our outsourcing partners, and the price of fuel is up. Surprise!
It’s post like zeke’s that make me wish cryptogon had a +/like option. Thanks,zeke!
It still doesn’t make much sense to me though. Transport is supposed to cost about nothing when you deal with very big quantities. And the minimum wage is somewhere around an order of magnitude less in developing countries.