Atlantic: The Insourcing Boom
After years of offshore production, General Electric is moving much of
its far-flung appliance-manufacturing operations back home. It is not
alone. An exploration of the startling, sustainable,
just-getting-started return of industry to the United States.
... What has happened? Just five years ago, not to mention 10 or 20 years
ago, the unchallenged logic of the global economy was that you couldn’t
manufacture much besides a fast-food hamburger in the United States. Now
the CEO of America’s leading industrial manufacturing company says it’s
not Appliance Park that’s obsolete—it’s offshoring that is.
Why does it suddenly make irresistible business sense to build not just
dishwashers in Appliance Park, but dishwasher racks as well?
In the 1960s, as the consumer-product
world we now live in was booming, the Harvard economist Raymond Vernon
laid out his theory of the life cycle of these products, a theory that
predicted with remarkable foresight the global production of goods
20 years later. The U.S. would have an advantage making new, high-value
products, Vernon wrote, because of its wealth and technological prowess;
it made sense, at first, for engineers, assembly workers, and marketers
to work in close proximity—to each other and to consumers—the better to
get quick feedback, and to tweak product design and manufacture
appropriately. As the market grew, and the product became standardized,
production would spread to other rich nations, and competitors would
arise. And then, eventually, as the product fully matured, its
manufacture would shift from rich countries to low-wage countries.
Amidst intensifying competition, cost would become the predominant
concern, and because the making and marketing of the product were well
understood, there would be little reason to produce it in the U.S.
anymore.
Vernon’s theory has been borne out again and again over the years.
Amana, for instance, introduced the first countertop microwave—the
Radarange, made in Amana, Iowa—in 1967, priced at $495. Today you can
buy a microwave at Walmart for $49 (the equivalent of a $7 price tag on a
1967 microwave)—and almost all the ones you’ll see there, a variety of
brands and models, will have been shipped in from someplace where hourly
wages have historically been measured in cents rather than dollars.
But beginning in the late 1990s, something happened that seemed to
short-circuit that cycle. Low-wage Chinese workers had by then flooded
the global marketplace. (Even as recently as 2000, a typical Chinese
factory worker made 52 cents an hour. You could hire 20 or 30 workers
overseas for what one cost in Appliance Park.) And advances in
communications and information technology, along with continuing trade
liberalization, convinced many companies that they could skip to the
last part of Vernon’s cycle immediately: globalized production, it
appeared, had become “seamless.” There was no reason design and
marketing could not take place in one country while production, from the
start, happened half a world away.
You can see this shift in America’s jobs data. Manufacturing jobs
peaked in 1979 at 19.6 million. They drifted down slowly for the next 20
years—over that span, the impact of offshoring and the steady adoption
of labor-saving technologies was nearly offset by rising demand and the
continual introduction of new goods made in America. But since 2000,
these jobs have fallen precipitously. The country lost factory jobs
seven times faster between 2000 and 2010 than it did between 1980 and
2000.
Until very recently, this trend looked inexorable—and the significance
of the much-vaunted increase in manufacturing jobs since the depths of
the recession seemed easy to dismiss. Only 500,000 factory jobs were
created between their low, in January 2010, and September 2012—a tiny
fraction of the almost 6 million that were lost in the aughts. And much
of that increase, at first blush, might appear to be nothing more than
the natural (but ultimately limited) return of some of the jobs lost in
the recession itself.
Yet what’s happening at GE, and elsewhere in American manufacturing,
tells a different and more optimistic story—one that suggests the
curvature of Vernon’s product cycle may be changing once again, this
time in a way that might benefit U.S. industry, and the U.S. economy,
quite substantially in the years to come. ...
... Even then, changes in the global economy were coming into focus that
made this more than just an exercise—changes that have continued to this
day.
- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
- The natural-gas boom in the U.S. has dramatically lowered the cost for
running something as energy-intensive as a factory here at home.
(Natural gas now costs four times as much in Asia as it does in the
U.S.)
- In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
- American unions are changing their priorities. Appliance Park’s union
was so fractious in the ’70s and ’80s that the place was known as
“Strike City.” That same union agreed to a two-tier wage scale in
2005—and today, 70 percent of the jobs there are on the lower tier,
which starts at just over $13.50 an hour, almost $8 less than what the
starting wage used to be.
- U.S. labor productivity has continued its long march upward, meaning
that labor costs have become a smaller and smaller proportion of the
total cost of finished goods. You simply can’t save much money chasing
wages anymore.
So much has changed that GE executives came to believe the GeoSpring
could be made profitably at Appliance Park without increasing the price
of the water heater. “First we said, ‘Let’s just bring it back here and
build the exact same thing,’ ” says Kevin Nolan, the vice president of
technology for GE Appliances. ...
... For years, too many American companies have treated the actual
manufacturing of their products as incidental—a generic,
interchangeable, relatively low-value part of their business. If you
spec’d the item closely enough—if you created a good design, and your
drawings had precision; if you hired a cheap factory and inspected for
quality—who cared what language the factory workers spoke?
This sounded good in theory. In practice, it was like writing a cookbook without ever cooking. ...
... “What we had wrong was the idea that anybody can screw together a
dishwasher,” says Lenzi. “We thought, ‘We’ll do the engineering, we’ll
do the marketing, and the manufacturing becomes a black box.’ But there
is an inherent understanding that moves out when you move the
manufacturing out. And you never get it back.” ...
While this article is talking about the return of manufacturing to the United States and think caution should be exercised in be optimism about new low-skilled jobs returning. The United States manufacturing sector has been growing at a steady rate even as manufacturing employment has tapered off and declined. I think automation, not globalization, is the longer-term threat manufacturing jobs.
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