As China costs rise, technology lures U.S. factories home

SCHENECTADY, N.Y./NEW YORK Tue Jul 24, 2012 10:50am EDT

A woman works at a textile factory in Xiangfan, Hubei province, China December 31, 2005. REUTERS/Stringer

A woman works at a textile factory in Xiangfan, Hubei province, China December 31, 2005.

Credit: Reuters/Stringer

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SCHENECTADY, N.Y./NEW YORK (Reuters) - Seesmart Inc SEST.PK, a small California lighting company, used to make all of its LED products in China, but last year that started to change.

Frustrated by expensive and slow shipping and wanting more control over the manufacturing process, the 15-year-old company started building factories in Simi Valley, California, and Crystal Lake, Illinois.

"When we do the numbers we're actually ahead manufacturing here instead of paying for air freight and dealing with the logistical issues that we're having in China," said Raymond Sjolseth, the company's president and co-founder.

With just $11 million in revenue last year, Seesmart is a tiny company, but it is one of many manufacturers of all sizes - from Master Lock (FBHS.N) to blue-chips General Electric Co (GE.N) and Caterpillar Inc (CAT.N) - that are expanding production in the United States.

After decades roaming the world in search of lower costs, U.S. manufacturers are finding that factories at home can compete with China, India, Mexico and other low-cost countries.

To be sure, labor-intensive industries like clothing and electronics, which are heavily dependent on hand assembly, are seen as unlikely to come back to the United States in a major way. And the trickle of returning jobs is far from a flood.

But higher transportation costs and wage inflation in China could drive more production back to the United States.

Prime candidates for return are bulky, heavy items. GE has shifted production of appliances from Mexico and China to Louisville, Kentucky, partly due to rising shipping costs. The new plant that Caterpillar is building near Athens, Georgia, will employ about 1,400 and make small bulldozers and excavators.

As manufacturers have learned to run factories with fewer workers - whose jobs consist of keeping high-cost, high-speed machines running smoothly, rather than assembling goods by hand - they have found that wages are a less critical issue in choosing a factory site.

Caterpillar, which has announced nine new plants or expansion projects in the past year alone, said it has chosen to grow in the United States both to meet local demand and because it has been able to find a steady supply of workers able to run the advanced equipment that powers its plants.

A survey by the Hackett Group Inc (HCKT.O) consultancy found that 46 percent of executives at European and North American manufacturing companies said they were considering returning some production to the United States from China, while another 27 percent said they were actively planning for or are in the midst of such a shift.

In the face of continued high unemployment, outsourcing and offshoring have become potent issues with U.S. voters. In the race for the White House, President Barack Obama, a Democrat, has called attention to job cuts made by private equity firm Bain Capital, formerly run by Mitt Romney, the presumed Republican nominee.

Despite the gloom, there has been a slight rise in U.S. factory employment. Some 11.95 million Americans worked in production jobs as of May, up 4 percent from the sector's recessionary low in January 2010.

Manufacturing gained its reputation as a key to the U.S. middle class, in part thanks to its historically unionized work force. However, companies including Caterpillar and the Detroit automakers have succeeded in winning concessions in labor negotiations that include two-tier wage structures that provide substantially lower wagers for the newest workers.


For a graphic on the closing cost gap in manufacturing:

For a story on U.S. Olympic uniforms being made in China:


At Seesmart, shifting production from China to the United States is cutting logistics costs by about 30 percent as it no longer needs to fly merchandise across the Pacific. Products can also be made and shipped to customers more quickly, Sjolseth said.

"The LED business involves a very compulsive buy, and the client can't tolerate long lead times," he said. "So if you're not delivering in four to six weeks, it's not going to happen. You're going to lose the deal and they're going somewhere else."

Higher wages have not been a roadblock for the company because its automated factories mean that labor costs represent less than 2 percent of the cost to manufacture lighting.

"Are our labor costs higher in the U.S. versus China? Yes, but in our case the total cost to produce our U.S. units is lower when all factors are calculated," said Sjolseth. The company today makes 20 percent of its products in the United States, a number it aims to push to 75 percent by the end of next year.


The falling share of wages in total costs also played a role in a new battery plant opened by General Electric in Schenectady, New York, this month.

"With all the manufacturing technology we have, labor is a relatively small component" of costs, said GE's chief executive, Jeff Immelt. "That's different today than it was 10 years ago."

The new plant will employ 450 people, a slice of the 14,500 positions the largest U.S. conglomerate has added since 2009. It employs 301,000 people worldwide and 131,000 in the United States.

The plant is highly automated, with high-tech machines processing the ceramic forms that surround the batteries. Some processes are still done by hand; during a recent tour of the site, workers were applying a layer of carbon paint to the cells with paint brushes.

The hand-painting is a technique that GE researchers used in developing the batteries, and it remains a more reliable approach than applying the carbon by machine, said Prescott Logan, general manager of GE's newly formed energy storage technologies unit. But GE is working on a way to reliably automate the process.

"There are a lot of parts of that factory that will look very different five years from now," Logan said.

Rising wages in emerging markets and higher shipping costs are also closing the cost gap between developing markets and the United States.

In 2005 it cost 45 percent less to make electric motors for automobile windshield wipers in China and ship them to the United States, rather than make them domestically, according to an analysis by AlixPartners.

Today, the Chinese motor costs only 18 percent less than a U.S.-made model. The consultancy forecasts that by 2015 the Chinese motor will cost just 9 percent less, due to rising wages and shipping costs and an appreciation in the Chinese yuan versus the U.S. dollar.

The study also looked at costs for motors made in India and Mexico and found they had risen, though not as dramatically as in China.

"If you go back to the heyday of outsourcing to China, at that time with the exchange rates and the ocean freight it was pretty hard to go wrong from a cost standpoint," said Steve Maurer, a managing director at AlixPartners who specializes in manufacturing efficiency.

"Now that costs in China are increasing ... people are stepping back and saying, 'We need to reevaluate this.'"

(Editing by Patricia Kranz and Leslie Adler)

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Comments (3)
Janeallen wrote:
It’s shortsighted to think about competing with Chinese manufacturers alone.

Many Chinese businesses have moved their manufacturing to Vietnam, and planning for the even cheaper Myanmar, to maintain their profit margin.

To focus on being a rival of a single country will impede us from making the best business plan to succeed in the long haul.

Jul 24, 2012 5:00pm EDT  --  Report as abuse
JamieGardner wrote:
Our ability to compete as a country resides in the leadership of our elected officials to serve their communities, lower taxes while company leadership and team members work towards common goals.

Jul 26, 2012 10:13am EDT  --  Report as abuse
ppp9988 wrote:
Of course the whole china thing is unfair competition. For example, if you open a company and hire 20 employees .. office envoironment.. a part of the startup cost is computers and software.

So, we pay for windows, office and what ever other packages are needed to perform the work. Lets see 20 x 200 dollars for windows, a server software package, than you have microsoft office for 20 people . Well lets say that is about $20 000 dollars at least ! Now look at our chinese compeditors. Do you think there is one paid software package running on their computers ? Not so. All stolen and copied. Interlectual property does not concern them.

But in all, their golden times are over. Demands for more salary,
demands for social benefits etc make it more and more unattractive
to manufacutre there. It is the always repeating story. Yesterday spain – in the 70s and 80s – cheap manufacturing.. but 10 years later,
the move back. China has abused and used their population to create cheap products. They filled their pockets on the back of the poor workers there, while doing nothing for them.
Dear Apple user and xbox fans, look at foxcon and flextronic. A work environment and climate that you could puke all day. People jumping from the roofs of the building are just the peak of the iceberg.
And the environment, lets not talk about that.

There is one lesson to be learned from the outsourcing:
It will not go for ever. Sooner or later demands for more salary,
demands for health benefits will surface and make the cheap
product more expensive. Too bad that by that time most of the domestic
jobs are killed thanks to shortsighted managers in our country.

I have been manufacturing and managing production in China for almost
15 years and i can surely say that manufactring in China is not cheaper and never has been cheaper.

You may save on labour cost, but you will spend a lot more money on quality control , delays, shipping and most of all on angry or even lost customers.

If you build the finest factory in china, best management there, you still will have one problem and that is your supply chain.
Maybe you are able to control the manufacturing process and qualtiy, but you can not control your supply chain. The permanent cost pressure will lead to inferior quality of the raw materials.

You will not get high performance and high quality for the lowest price. That is simply the way it is. Quality and performance cost money and it does not matter if that is in the USA or in China.

Jul 29, 2012 7:31pm EDT  --  Report as abuse
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