By Rajkamal Rao
See Also: Promising Opportunities in Robotics & High Tech Manufacturing
Change is coming to a US industry sector previously considered unthinkable - manufacturing. In recent months, the American media has been reporting success stories of manufacturing returning to the United States. In a play against the dreaded word “outsourcing”, these refer to “insourcing” developments in light, heavy and high tech manufacturing.
Some examples. The venerable General Electric has invested more than $1 billion in retooling a sprawling factory in Louisville, Kentucky, to make dishwashers. Apple’s CEO Tim Cook, in an interview with NBC News earlier this year, said that Apple may be making select Macbooks in the US. In November 2013, Reuters reported that Apple will open a manufacturing facility in Arizona to make sapphire materials for Apple's popular electronics devices. PC World says that Foxconn, a Taiwanese giant which manufactures technology products for many firms, may expand its existing manufacturing operations in the U.S. In March, Inc. magazine, listed several companies as returning manufacturing to several US states, including Otis (South Carolina), Buck Knives (Idaho), Caterpillar (Texas), and Coleman (Kansas).
Insourcing is a key part of an overall resurgence in manufacturing. Foreign Direct Investment in US manufacturing is another engine of growth and stability. Consider the automotive industry. According to the US Department of Commerce, nine foreign-based motor vehicle companies (one Korean, six Japanese companies and two German) produce vehicles in fifteen large auto plants in the US. To varying degrees these companies have encouraged their traditional supplier firms to co-locate new facilities in the US to supply their new operations. Many of these firms have announced new investments over the next few years. In addition, there are new players on the horizon, including Hyundai’s subsidiary Kia, with plans to open US plants.
Let us step back and review recent history. The conventional wisdom for decades has meant that the US with its brilliant applied Research & Development labs and marketing prowess completes the bookends of a product - design, marketing & sales - whereas countries with cheap labor complete the middle pages (i.e. manufacturing) in a far-flung global supply chain framework that is well tuned and optimized.
But several American companies now are reevaluating this wisdom under the age-old business adage - that the only constant is change. So, what changed?
For one thing, oil prices. Ten years ago, oil prices were about a third of what they are now. It was cheap for a US company to ship raw materials to China (where wages are substantially lower) and have products shipped back to US ports. No more. Shipping costs take a substantial bite out of a product’s overall cost.
Second, the US has developed a significant advantage in energy. Analysts predict that the US will be a net energy exporter in just a few years’ time. US natural gas prices are about a quarter of what they are in other parts of the world. As National Public Radio (NPR) reported in a recent broadcast on Insourcing, that GE dishwasher factory in Louisville is able to work its machines using cheap electric power generated from natural gas at prices much lower than what they would be in China.
Third is the concept of vertical integration - that is, getting a single location to do all the elements of the production supply chain. The NPR broadcast reported that every professional involved in the dishwasher - product designers, tool engineers, manufacturing technicians, marketing professionals, quality control specialists - works in a big room with no offices or cubicles. Feedback is practically instant. For example, the marketing team hated the look of four prominent screws on the front of the dishwasher while workers found them to be taking too much time to fasten on the assembly line. Based on feedback, designers redesigned the front with no screws. The newer approach not only saved costs but made the product look better.
Fourth is the role of the US government and the unintended consequences of its policies. As the Federal Reserve continues to print money to help encourage domestic growth, there is an abundance of dollars in world markets. This means that the US dollar will continue to weaken against major currencies in the coming years. Take the case of China, the largest buyer of US treasuries. In 2008, one US dollar could buy nearly 7.50 Chinese Yuan. Today, the same dollar can buy just 6.18 Yuan. For a US company, it’s 16% cheaper to produce in the US than in China based on currency devaluation alone - and with margins as tight as in manufacturing overall, the 16% savings may well be a decider.
Fifth is the way US states have stepped up incentives, tax breaks and the offer of even free land to companies that invest in them. The NY Times recently concluded that nearly $87 billion is spent by states on this effort. Companies have a big reason now to invest in US manufacturing plants rather than outsource to China or India.
Sixth is wage inflation in China - the world’s factory. The Wall Street Journal reports in a story on May 1, 2013 that after a decade of nearly 20% annual wage increases in China, Lever Style, an apparel company says it can no longer make money by producing in China and is moving apparel production to Vietnam, where wages can be half those in China. Forbes Magazine reported in 2011 that Chinese wages have been rising at an average annual rate of 14% during the past decade (lower than WSJ estimates) and are likely to “maintain the same pace for the next 5-10 years”. No matter which number you believe, this is double-whammy for the Chinese. Not only is their currency strengthening but their labor costs are rising too.
The lesson for international students is clear. US manufacturing is bouncing back and there are likely to be plenty of opportunities in the coming years in high tech manufacturing fields such as robotics, advanced manufacturing software, automation, specialized materials and 3-D printing. Time magazine, in an article in its April 22, 2013 issue, reports that the average wages of a worker in modern US manufacturing are $77,060. Not bad for an industry that has lost nearly 60% of its workers since 1979 to outsourcing, attrition and layoffs.