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Insourcing: the Return of American Manufacturing

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Joined: 27 Apr 2004

PostPosted: Sat Dec 01, 2012 1:15 pm    Post subject: Insourcing: the Return of American Manufacturing Reply with quote

The Insourcing Boom

For much of the past decade, General Electric’s storied Appliance Park, in Louisville, Kentucky, appeared less like a monument to American manufacturing prowess than a memorial to it.

The very scale of the place seemed to underscore its irrelevance. Six factory buildings, each one the size of a large suburban shopping mall, line up neatly in a row. The parking lot in front of them measures a mile long and has its own traffic lights, built to control the chaos that once accompanied shift change. But in 2011, Appliance Park employed not even a tenth of the people it did in its heyday. The vast majority of the lot’s spaces were empty; the traffic lights looked forlorn.

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.

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.”

Mr. China Comes to America

Blogging software and related technologies have made it easier for entrepreneurs in the realm of ideas to expose their products to a worldwide market test. Three-dimensional printing and related technologies are making it easier for entrepreneurs interested in making physical goods to expose their products to the worldwide market. America has more than its fair share of such potential innovators, thanks to immigration, our still-strong university and public research centers, and the financial and cultural underpinning of a start-up culture. The terrain is shifting in a way that should draw more entrepreneurs to manufacturing and let more of their ideas succeed. This should in turn foster more manufacturing work within the United States than was feasible a few years ago. Companies with the right connections to foreign suppliers and foreign markets will grow even faster.

But rather than simply shifting manufacturing work from rich countries to poorer ones, this latest technological wave should allow all regions to grow. “As business has become faster and more globally connected, that’s been good for American companies overall but bad for America’s low-skilled manufacturers,” Phil Baker, the designer for Apple and other companies, told me. “Now speed and connections allow start-ups to compete with much larger companies, and often beat them.”

American manufacturing employment will continue to disappoint, since much of the loss of manufacturing jobs come with technological innovation and productivity gain. Additionally, slumping demand in a permanently weak economic environment will ail manufacturing employment. But insourcing begins to recuperate the loss of manufacturing jobs to SE Asia and China. There is some good news out there.
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Joined: 27 Apr 2004

PostPosted: Fri Dec 07, 2012 3:07 pm    Post subject: Reply with quote

Apple CEO Tim Cook says the company will invest $100 million to make Macs stateside

For more than a dozen years, Apple has relied on a “designed in the U.S., made in China” strategy. That’s chiefly because the cost of labor in China is so much cheaper. This simple reality has shifted the globe’s economic center of gravity over the past decade. China has become the world’s manufacturing hub.

But that influx of wealth into China hasn’t only meant more money for factory owners and CEOs. Hal Sirkin, a senior partner with The Boston Consulting Group, has spent the past two years examining the phenomenon of “insourcing” — the return of jobs to the U.S. from overseas. When China joined the World Trade Organization in 2001, Sirkin says, the average Chinese worker made 58 cents per hour — a cost that had companies around the world banging on the doors of Chinese factories. Every year since, however, Sirkin says wages in China have risen an average of 15 to 20 percent annually.

“Once labor stops becoming cheap, all of a sudden the equation turns,” he says.

Worker productivity adds another variable that could make the math behind insourcing even more attractive to U.S. companies. Sirkin says American workers are about three times as productive as their Chinese counterparts, even as the Great Recession has kept U.S. wages stagnant. At 58 cents an hour, 10 Chinese workers were still cheaper than a single more productive worker in the U.S. But by 2015, if current trends continue, Sirkin says the wage gap will shrink enough that lower productivity combined with transportation costs will make Chinese workers the more expensive option for making goods to be sold in the U.S.

Americans will likely reward companies that return manufacturing centers from abroad.
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PostPosted: Fri Dec 07, 2012 3:23 pm    Post subject: Reply with quote

Yeah, it is interesting. Tim Cook is a very clever guy who rose to his position from the operations/supply chain side of things (relatively rare among CEOs), so I'm all the more intrigued to see how it will differ from the Foxconn line-up (I own a MacBook Pro and think it's a great machine, but if a company Apple could manufacture it themselves in the US, I'd be willing to wager the quality would be better). Still, $100 million isn't a whole lot to fuss over, and while I'd be keen to buy made-in-USA products, I doubt I'd be willing to pay more than a 10% mark-up on it...
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PostPosted: Fri Dec 07, 2012 6:16 pm    Post subject: Reply with quote

They'll "insource" the labor from Mexico too.

The wage level of the United States has been sufficiently depressed that the cost-spread with third world toilets is about nil, factoring in transportation.
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