After Decades of Exodus, Companies Returning Production to the U.S. (Generac)

May 13 -- In 2001, Generac Power Systems joined the wave of American companies shifting production to China. The move wiped out 400 jobs in southeast Wisconsin, but few could argue with management's logic: Chinese companies were offering to make a key component for $100 per unit less than the cost of producing it in the U.S.

Now, however, Generac has brought manufacturing of that component back to its Whitewater plant — creating about 80 jobs in this town of about ‎14,500 people.

The move is part of a sea change in American manufacturing: After three decades of an exodus of production to China and other low-wage countries, companies have sharply curtailed moves abroad. Some, like Generac, have begun to return manufacturing to U.S. shores.

Although no one keeps precise statistics, the retreat from offshoring is clear from various sources, including federal data on assistance to workers hurt by overseas moves.

U.S. factory payrolls have grown for four straight years, with gains totaling about 650,000 jobs. That's a small fraction of the 6 million lost in the previous decade, but it still marks the biggest and longest stretch of manufacturing increases in a quarter century.

Harry Moser, an MIT-trained engineer who tracks the inflow of jobs, estimates that last year marked the first time since the offshoring trend began that factory jobs returning to the U.S. matched the number lost, at about 40,000 each.

"Offshoring and 're-shoring' were roughly in balance — I call that victory," said Moser, who traces his interest in manufacturing to his parents' work at the long-closed Singer Sewing Machine plant in New Jersey. (He once worked there too.)

He now runs the Reshoring Initiative, a Chicago nonprofit that works with companies to bring manufacturing jobs back to the U.S.

Several factors lie behind the change.

Over the last decade, Chinese labor and transportation costs have jumped while U.S. wages have stagnated. The average hourly pay for non-supervisory manufacturing workers in the U.S. has barely kept up with inflation, rising on average just 2.3% over the last 10 years and by only half that since 2010, according to Labor Department figures.

Factoring in the rise in value of its currency, China's base wage, measured in dollars, has risen 17% a year, according to an April report by Boston Consulting Group.

Manufacturing also has become more automated, further reducing labor's weight in the cost equation.

The boom in natural gas production in the U.S., largely driven by fracking and other new drilling techniques, has led to a 25% decrease in gas prices in the U.S., contrasted with a 138% increase in China, Boston Consulting found.

And the rise of online commerce has made local control of supply chains more important, especially because many U.S. manufacturers report growing problems with quality control of goods made in China.

"We got to the point where everything we were bringing in had to be inspected," says Lonnie Kane, president of Los Angeles apparel maker Karen Kane, noting that his company used to check just 10% of goods from China.

"Now prices are escalating, quality is dropping and deliveries are being delayed," he says. In the last three years, Kane has shifted 80% of his production from China back home.

Expansion in the domestic apparel industry remains unusual because the labor-intensive work can be done in many low-wage countries. But in other industries, a growing number of domestic and foreign companies — including General Electric, Caterpillar, Toyota and Siemens — are opting to build or expand their facilities in the U.S., particularly in the Southeast, where labor costs are relatively low.

The main reason companies relocate out of California to places like Texas is the average home price in Dallas is $192,000 versus the average home price in Los Angeles which is over $500,000. The difference in taxes in minor compared to a corporations ability to hire the same worker in Texas who...

For the first time, some small contract manufacturers in the U.S. are beating bigger rivals in Asia, the center of global industrial production.

At Zentech Manufacturing in Baltimore, the company's president, Matt Turpin, recalls his skepticism when salesmen told him two years ago about their efforts to land a contract making 5,000 to 10,000 wireless printers. He was sure an overseas competitor would get the work.

"I don't know why you're wasting your time chasing that business," he says he told the sales force.

Zentech ultimately won the contract, and Turpin says the company added at least five full-time employees to his shop, where the front office window is draped with a large American flag.

William Davidson, a test technician at Zentech, now earns $17.50 an hour working on those printers and other company products. Before getting hired at Zentech three years ago, Davidson, 62, had been unemployed for 18 months. His previous employer, a Delaware repairer of cable boxes, had moved its operations to Mexico.

"The worst part of it was we had to help them pack things up for the move," he says.

Here in Wisconsin, a similar story has played out with Generac.

Aaron Jagdfeld, the company's chief executive, was the comptroller at the time of the offshoring. Jagdfeld, now 42, had grown up in the region and graduated from the University of Wisconsin at Whitewater with an accounting degree.

The offshoring "didn't feel right" because of the families affected by layoffs, he said, but the company needed to make the move to remain competitive.

Generac grew rapidly over most of the rest of the decade. Its sales rose to $1.5 billion last year, and it now has about 3,300 workers, including 720 in Whitewater, its largest plant. But the last decade also saw costs surge in China while they increased little in the U.S.

What began as a $100 gap in the cost of producing an alternator narrowed as the Chinese yuan jumped in value and Chinese wages and other costs soared.

The tipping point came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant. The company can now produce an alternator with one worker in the time it took four workers in China.

Although a small price gap remains, Jagdfeld figured that having greater control over delivery would make up the difference.

More frequent power outages —from Hurricane Katrina and Superstorm Sandy, not to mention this past winter's ice storm in the South — have brought bursts of orders for portable generators, challenging the company's inventory and delivery capabilities.

"We were constantly fighting a battle for what product was needed, and we were always guessing wrong," Jagdfeld said. "We kept saying, 'If we could just control the alternator, we'd have a better opportunity to respond more effectively.'"

Those sorts of calculations lead experts who have studied reshoring to see potential — particularly for makers of appliances, transportation equipment, electronics and machinery — to return jobs to the U.S.

Led by these industries, 21% of large manufacturers in the U.S. said they were already returning production or would do so over the next two years, according to a survey Boston Consulting conducted last summer.

"In 2012, companies told me 'you're crazy,'" said Hal Sirkin, a senior partner at the consulting group's office in Chicago. "Now they're doing it — maybe not all the way, but they're testing the waters."

www.latimes.com/business        Don Lee

Briggs Grapples with Higher Wages, Human Turnover in "Low-Cost" China

Shanghai -- March 26 -- U.S. lawnmower manufacturer Briggs and Stratton is used to worrying about turnover - just not the human kind.

Like many foreign investors in China, the Milwaukee-based firm has been hit by a steady rise in wages - which puts it in the same boat as many U.S. businesses in China responding to a survey released on Monday by the American Chamber of Commerce.

After decades of aggressive expansion in China, foreign employers like Briggs and Stratton face a relative shortage of experienced, English-speaking engineers and managers, and find it increasingly expensive to recruit and retain good staff.

Rather than waiting around for extra digits on their paychecks, China's white collar workers are creating their own pay raises by jumping ship at the slightest temptation.

"Turnover is a huge issue for anyone in China. Our turnover is 9 to 10 percent," said Mark Plum, Asia president for Briggs and Stratton in Shanghai. He added that in Shanghai, turnover rates were generally around 18 to 20 percent.

"Anywhere else you'd say that was terrible. Here, it's not half bad."

On the factory floor as well, cheap labor no longer looks limitless, prompting manufacturers to consider moving from the country's prosperous coast to poorer, cheaper inland regions. Some are even taking their lowest-margin, most labor-intensive operations to other countries altogether, such as Vietnam.

Employees and wages now top the preoccupations of American investors in China, according to AmCham's annual business-climate survey of 390 companies.

"I think it speaks to the economic transition that China is in now that it will not be able to rely on cheap labor to drive exports into the future," AmCham Chairman Ted Dean said.

"Management-level human resource constraints" ranked as the biggest business challenge in the survey, cited by 43 percent of respondents compared with 30 percent last year. "Non-management level" constraints were ranked third.

Labor costs ranked as the third greatest challenge, after an economic slowdown in China and the wider global economy.

Though 39 percent of respondents surveyed by AmCham said their Chinese operating profit margins were higher than their global margins, only slightly fewer firms - equal to a third - said their Chinese margins were actually lower. For the rest, Chinese margins were comparable with their global operations.

In a similar survey released by AmCham in Shanghai last month, 90 percent of respondents saw rising costs as a hindrance to businesses. About the same number said finding skilled labor was a challenge.

"There's been an absolute explosion of consciousness of this issue," said Kim Woodard, of consultancy InterChina.

"It's not just because the media have covered it but also in internal budgets they are seeing a 20 percent rise in wages."

Government statistics show that average monthly urban wages rose by 13.3 percent between 2009 and 2010, although companies' actual cost structures can vary considerably.

As the number of adults flowing into the workforce slows, China can no longer attract manufacturing with the promise that an unending pool of rural migrants will keep its wages down.

China's population of 20-year-olds to 30-year-olds fell to around 200 million in 2005. It is expected to climb through 2015 but then fall off again, to below the 200 million mark by 2020, according to a presentation by China International Capital Corp.

That, plus competition for workers by expanded domestic and foreign-invested industries, should help shift more bargaining power to workers to get higher wages and better benefits.

InterChina used to build in simple wage rises of 5 to 8 percent a year when helping clients carry out feasibility studies for new operations in China, Woodard said.

That calculation is now a lot more complicated, with investors having to weigh China costs against Vietnam or India.

Rising Chinese wages will surpass those of Mexico in about five years, he estimated, giving Mexican factories an advantage when exporting to the U.S. market.

Unlike the supply of manual laborers, the number of college graduates is rising steeply. But companies often complain that graduates with the right skills and experience are hard to find, and expensive to keep.

An engineer with up to five years' experience can be hired for $9,500-$20,000 in China, says recruitment firm J.M. Gemini.

This doesn't mean that jobs will flow back to the United States: the average salary of a worker in Milwaukee is $33,140 a year, far above China levels.

While Briggs and Stratton's 3,000 employees in the United States are probably keenly aware that America's manufacturing base is shrinking, Chinese graduates often view their current job simply as a springboard to the next one.

"What happens here is that you get a young person who speaks pretty good English and has worked for two to four years. If the guy is under 30, he may have worked for four companies in just two years," Plum said.

"In the States, you'd never hire the guy because you'd say he can't hold down a job. Here you just have to say well, that's how it is."

Briggs and Stratton, which also makes snow-blowers and other small engines, employs mechanical engineers in China as well as people to figure out how to price and market products. It runs a factory outside Shanghai, one of five international facilities.

According to its website, "Briggs and Stratton believes there is an engine inside everyone that drives him or her forward".

In China, it is forced to fuel that engine with team-building exercises to keep employees loyal, such as taking staff to outdoor sports events or on overnight company retreats.

"As a company, we're not used to having to keep people entertained," Plum said.

"If you get laid off in Milwaukee, there's no jobs - so no one leaves the job they have. Here, if you get laid off or leave, there's a hundred jobs."

China to Lose Edge over U.S. by 2016 Says Manufacturing Group Economist

May 18 -- Based on recent analyses and reports, a leading manufacturing sector economist asserts the Chinese will stand to lose significant market share in the years to come, and will have not a cost advantage over U.S. manufacturing by the year 2016.

"Such a statement would have evoked peals of laughter and derisive remarks only a few years ago, but times change and situations alter," says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA). "There are no guarantees, of course, and these reports make it clear that idiotic policies can still ruin the trend.

"But analysts are starting to string together some of these trends, and they inevitably point to better news for the U.S. than for China. Some feel that it has been a nice run for the Chinese, but all things must come to an end," Kuehl states in the current economic update newsletter Fabrinomics published by FMA.

Kuehl points out that in 1990 the Chinese share of world manufacturing output was a paltry 3 percent. Today its share is 19.8 percent and the U.S. is slightly behind at 19.4 percent.

"The Chinese built quickly on a base of low wage workers and significant government assistance as well as a very low valued currency that has allowed the growth of the export economy," he says. "The future is not looking so positive for the Chinese, however. Wages are growing at 17 percent annually, while in the U.S. they are growing at 3 percent.

"That is just for the average worker's wage," he stresses. "If one looks at the managerial levels and among skilled workers, the rate of Chinese wage growth is about 135 percent per year; in the U.S. that same group is seeing wage growth of 3.7 percent. The Chinese pay scale is still far less than in the U.S., but that gap is closing very fast."

Kuehl admits China has made great strides in terms of productivity – an improvement of 10 times in the last 20 years. Yet, he claims, this still leaves China at a third of the productivity the U.S. boasts, and the U.S. is seeing productivity gains of almost 8 percent per year these days.

"The amazing observation from all this is that China is not going to have a cost advantage over the U.S. after 2015," he says. "If, as expected, the Chinese are forced by inflation threats to start pushing the value of their currency higher, the balance could shift pretty quickly. Then there is the potential for much higher transportation costs as the price of oil rises. None of this will cause the U.S. manufacturer to shed a tear."

In the newsletter article, Kuehl notes the U.S. currently competes with the Germans in terms of the value of their manufacturing, as these nations combined cover almost 80 percent of global value. "These are the countries that supply the high value manufactured goods while the Chinese are still focused on the cheaper consumer goods," he explains. "The U.S. will see that lead expand, but there will be competition from China in these areas as they will see these more expensive goods as the only way to retain some competitive edge."

Kuehl believes that for both nations future emphasis will be on the domestic market and that could well be significant for the U.S. manufacturer in a variety of ways.

"If China shifts its attention to its own domestic market and away from exports, it will allow U.S. producers to recapture domestic market share," he says. "As the U.S. manufacturing company looks to its own market, it will be generally better positioned than the Chinese competitor as the distribution infrastructure in the U.S. is better suited than China's."

According to Kuehl, most everything in China's transportation network is currently pointed out of the country to service export, and its internal transportation system is often inferior. China will need some infrastructure work to be able to service its domestic markets as effectively as U.S. suppliers are able to service American customers.

"This is not to say that China will cease to exist as a global competitor, but it does suggest that the same patterns that affected other fast growing nations have started to impact them," he says. "Japan looked unstoppable in the 1970s, and they faded over time. It now appears to be the beginning of China's return to earth."

www.thefabricator.com