Wall Street Journal ran a series of articles on firms moving their production back to the US. These articles are doing a good job outlining the main reasons for moving the production back to the US, but it also reveals that building expectations regarding significant job growth due to it, maybe a little premature and bit optimistic.
The first article (“Otis Shifts Work Closer to Home“) discusses Otis, an elevators manufacturer that recently moved its production from Mexico to South Carolina. The two prime reasons that are mentioned are: proximity to customers, as a way to cut outbound transportation costs and having the manufacturing plant and the engineering under one roof to cut costs even further.
Among other things, the plant will be closer to many of the company’s customers, about 70% of whom are on the East Coast of the U.S. The company figures that will lower its freight and logistics costs 17.3%. Another 20% of savings, the company says, will come from “efficiencies” of having all its white-collar workers associated with elevator design and production located at the new factory. The company, which is based in Farmington, Conn., had only final-assembly operations in Mexico, keeping design and engineering jobs in the U.S. That meant toolmakers from Dallas and engineers and designers based in Indiana and Arizona had to travel across the border.”We really needed to rationalize our supply chain, and the way to do that was to have everything in one place,” says Mr. Michaud-Daniel.”
While the former is usually accounted for when firms make the decision to off- (or on-) shore, this is rarely the case with the latter. Many firms realize only in retrospect that the overhead costs of managing productions and engineering across the Atlantic can be quite high.
The second article discusses Taphandles, (“A Company Grows, and Builds a Plant Back in the U.S.A.” ) that shifted some of its production capacity from China to Washington. The reasons here are somewhat different: increased production costs in China and longer lead times:
The lead time for orders coming from China is three weeks, and all of our brewery clients want our products faster — that’s the first thing they say when we meet with them.”…” We’ll break even on production, but come out ahead once we factor in lead time. Right now, we’re losing orders because of lead time.
Once we started looking into it, we found the decision made business sense on many levels. Our Chinese labor costs have increased 300 percent since 2006, when we opened our factory there. Even at the higher wages Chinese workers are demanding, it’s gotten harder to find labor. To stay competitive we’ve also had to upgrade benefits like dormitories and food. On top of that, the Chinese currency continues to appreciate — it was valued at 8.28 to the dollar when I started the business. Now it’s at 6.38. And I predict shipping costs will keep going up as a result of the rising cost of oil.”
While the article predicts that 2-3 million jobs will move from China to US, it also reveals that in many cases, firms transfer tasks done by humans in China, to be done in the US, albeit, primarily by machines:
we’re replacing Chinese labor with machines run by United States workers. The machines will make 10 times more product than a person could in China.”
For example, while Taphandles moves some of its production to the US, its staple product, the handles themselves (which amount to 98% of its revenues) will remain in China. Apparently, The tap handles have very intricate shapes — for example, the teeth on a whale — that require detailed hand painting. It’s labor that according to their managers, one can’t automate.