US factories head home as costs in China soar

Higher transportation costs and wage inflation in China driving more production back to the US

Seesmart Inc, a small California-based 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 company’s President Raymond Sjolseth.

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 to blue-chips General Electric Co and Caterpillar Inc - that are expanding production in the United States. After decades roaming the world in search of lower costs, US manufacturers are finding that factories at home can compete with China, India, Mexico and other low-cost countries.

Labour-intensive industries like clothing and electronics, which are heavily dependent on hand assembly, are seen as unlikely to come back to the US 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 US.

Prime candidates for return are bulky, heavy items. GE has shifted production of appliances from Mexico and China to Louisville, Kentucky, 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 , said it has chosen to grow in the US 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 consultancy found that 46 per cent of executives at European and North American manufacturing companies said they were considering returning some production to the US from China, while another 27 per cent said they were actively planning for or are in the midst of such a shift.

Manufacturing gained its reputation as a key to the US middle-class, in part thanks to its historically unionised workforce. However, companies including Caterpillar and the Detroit automakers have succeeded in winning concessions in labour negotiations that include two-tier wage structures that provide substantially lower wages for the newest workers.

At Seesmart, shifting production from China to the US is cutting logistics costs by about 30 per cent as it no longer needs to fly merchandise across the Pacific. Products can also be made and shipped to customers more quickly, Sjolseth said.  Higher wages have not been a roadblock for the company because its automated factories mean that labour costs represent less than 2 per cent of the cost to manufacture lighting. “Are our labour costs higher in the US versus China? Yes, but in our case the total cost to produce our US units is lower when all factors are calculated,” said Sjolseth. The company today makes 20 per cent of its products in the United States, a number it aims to push to 75 per cent by the end of next year.

Narrowing cost gap

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, labour is a relatively small component” of costs, said GE 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 US conglomerate has added since 2009. It employs 301,000 people worldwide and 131,000 in the US.

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. Rising wages in emerging markets and higher shipping costs are also closing the cost gap between developing markets and the US. In 2005, it cost 45 per cent 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 per cent less than a US-made model. The consultancy forecasts that by 2015, the Chinese motor will cost just 9 per cent less, due to rising wages and shipping costs and an appreciation in the Chinese yuan versus the US dollar. The study also looked at costs for motors made in India and Mexico and found they had risen.

“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 specialises in manufacturing efficiency. “Now that costs in China are increasing... people are stepping back and saying, ‘We need to reevaluate this.’”