Dean Barber

Was Offshoring a Fad?

In Uncategorized on February 19, 2012 at 7:30 am

This past week, Jim McNerney, the CEO of Boeing, spoke of a “lemming like” tide of manufacturers seeking to offshore their manufacturing capabilities.

With growth slowing in China and much of Europe, companies are now adding capacity in the United States, replacing aging equipment and even moving overseas production back from low-cost labor markets.

The chase for lower-paid workers around the world drove this thing we call offshoring, contributing to (but not the sole reason) for the U.S. manufacturing sector falling by 40 percent from its 1980 peak. But now companies are starting to realize that the benefit of lower wages can be offset by higher logistics and materials costs and greater efficiencies realized by technology here at home.

“We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost,” said McNerney. “We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here.”

That got me thinking, which can be a dangerous thing no doubt. McNerney’s remarks, made last week at a Washington event organized by GE aimed at promoting the competitiveness of the U.S. economy, would suggest that offshoring may have been a business fad rather than a reasoned strategy for some U.S.-based manufacturers.

The thinking in some board rooms could have been something like this:

“Well, we got to have plant in China, because our competitors and just about everybody who is anybody has a presence there. Hell’s bells, Coyote Acme right down the street from us has just opened a plant in China. We need to be over there.”

I am reminded of a scene in the movie “O Brother, Where Art Thou?” Depression-era Mississippi Gov. Pappy O’Daniel is facing a daunting challenge in his bid for re-election. One his aides suggests: Well people like that reform. Maybe we should get us some.”

That “maybe we should get us some” has been a hallmark strategy for some U.S. manufacturers in the past decade. But now things are becoming more clear. Now manufacturers are realizing the total costs involved, not just the cost of labor (which is rising) for operating plants abroad. These extended and vulnerable supply lines come with a cost, not just in dollars but in terms of quality and serving your customer well.

It is true that China is a huge, growing market and poised to become the largest economy in the world. That’s a given. And it’s also true that U.S. companies may need a presence in China to serve that growing market. But it does not follow, as many companies are now discovering, that a Chinese manufacturing presence makes sense for the purpose of serving a domestic market here in the U.S.

Carlisle Companies, a Charlotte, NC.-based conglomerate that makes insulation, tires and restaurant supplies, plans to open two new plants in the U.S. and bring tire production back to the U.S. from China.

“We find it as cheap to manufacture in the U.S. as China,” Carlisle Chief Executive Dave Roberts wrote in an email to the Wall Street Journal. “We will still manufacture in China, but the idea would be to manufacture product for Asia in Asia, for the U.S. in the U.S.”

Wow, what a revolutionary idea – building plants to serve regional demand. Actually, that was the whole idea behind  a wave of Japanese, German and Korean auto manufacturers building plants in the United States, principally in the Southeast. They wanted to tap into the U.S. automotive market by having a physical presence here.

I have always believed in a herd mentality to business. Businesses will seek to emulate  what perceived industry leaders are doing or are trying to do. We find ourselves doing this even with the language we use. We come up with faddish business jargon in a desire to be perceived as cutting edge achievers today. You do not want to be perceived as “so yesterday” even if yesterday was rooted in foundational truths like quality and customer service.

It’s true that innovation drives our productivity and competitiveness, but not everyone can or will lead pioneering efforts. More often than not, strategies and methods are poached, copied and deemed industry “best practices.” But sometimes those best practices aren’t so best. Sometimes you have to forge your own path for best results.

So I think now that many US manufacturers are scratching their heads and saying, “You know, our offshoring strategy has not worked as well as we thought it would have. Maybe we need to reconsider what we are doing.”

Maybe that reform wasn’t all what it was cut out to be.

This past week, President Obama spoke at the Master Lock plant in Milwaukee and the Boeing plant in Everett, Wash., where he touted what he hopes, and what the evidence suggests will be a “Made in America” resurgence.

The president’s message was simple and direct: “I want us to make stuff. I want us to sell stuff.”

And he is absolutely right. As a nation, for our nation’s economic wellbeing, we have to make stuff. Manufacturing must always be a core strength to be nourished and protected.

Also this past week, I was invited to a reception given by a consultant here in Dallas. His focus, which he does very well, was helping retailers on market analysis and finding optimal locations for future store sites. But he introduced me to an audience of mostly economic developers and I spoke very briefly.

My emphasis, I told the group unapologetically, was manufacturing. My consulting business is built around helping manufacturers find the best locations for future operations. I continue to believe manufacturing is what builds wealth in a community.

I did not say this to the group, but I believe it to be true — that a community without an existing seed or foundation of manufacturing has a shallow, hollowed-out economy built upon a house of cards. I have been to communities where there is no manufacturing, where the local economy is based on tourism and real estate development. Most of the people there are not making good wages. Their skill sets are quite limited.

Manufacturing today, however, requires high skill sets and corresponding pays well. And it has a profound multiplier effect on a local economy and beyond. The National Association of Manufacturing (NAM)  says that each dollar’s worth of manufactured goods creates another $1.43 of activity in other sectors, twice the $.71 multiplier for services. Two thirds of U.S. research and development capacity is concentrated in manufacturing.

So this is important stuff. Manufacturing is the bedrock to a strong American economy. I think President Obama understands this. And his remarks this past week should hearten both U.S manufacturers and economic developers.

The Obama administration wants to scrap tax deductions for shipping jobs overseas, and offer new incentives for returning them to the United States. The administration is also pushing for a $2-billion-per-year tax credit to encourage manufacturers to invest in struggling communities

“If you’re an American manufacturer, you should get a bigger tax cut. And if you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here,” Obama said in Everett.

“And finally, if you want to relocate in a community that’s been hit hard by factories leaving town, then you should get help financing that new plant, or financing that equipment, or training for new workers.”

Now if you believe what he says, how can you not be in favor of that? And please understand that I am not telling you who I am voting for in November. My political beliefs and leanings are not the purpose of this blog.

But a word of caution is in order. Despite indications that re-shoring will take place in growing numbers, it is but a trickle now. And all the manufacturing jobs lost will not be replaced.

One reason the Master Lock plant in Milwaukee survived is it’s now making more padlocks with fewer people. Even with the 100 or so new hires in the last year, the plant employs just over a third as many workers as it did in the mid-1980s. The reason: automation, which increases productivity. The president said as much.

“And look, the hard truth is, a lot of those jobs aren’t going to come back because of these increased efficiencies. And in a global economy, some companies are always going to find it more profitable to pick up and do business in other parts of the world. That’s just the nature of a global economy.”

The fact is that re-shoring alone can’t claw back the millions of jobs lost during this past recession. But it can make a huge dent.

After falling every year since 1998, the number of manufacturing jobs rose in the U.S. in both 2010 and 2011. Since December 2009, the sector has added 300,000 jobs. Manufacturers added 50,000 people to their payrolls in January alone.

Over the next decade, the Boston Consulting Group projects that $100 billion in goods production can return to U.S. shores, and that the creation, or re-creation, of hundreds of thousands of jobs will help reduce the unemployment rate by 1.5 percent.

Unlike off-shoring, I do not see re-shoring as a business fad, but rather a business trend. The difference may be semantics. Re-shoring or insourcing will be based on certain realities that the U.S. makes better sense as a place for manufacturing in terms of costs, efficiencies, quality and serving the home base. I’m not sure such a reasoned approach was always taken with decisions to off-shore production.

And it’s here, in this American market, where American customers can often be better served. Old ideas like quality and customer service are being viewed anew. This is basic blocking and tackling, but it’s also patriotism.

“You are going to see more (manufacturing) come back to the United States, and that’s in part for business reasons and in part because we want to be good citizens,” McNerney said.

Need a partner in results-oriented site selection? Contact Dean Barber at 972-890-3733 or at dbarber@barberadvisors.com Barber Business Advisors, LLC, is a site selection and economic development consulting firm based in Plano, Texas. Please visit our website at www.barberadvisors.com

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  1. A facet of the return to stateside manufacturing is indeed quality issues. A hard lesson but one the lemming attitude sadly required. Your citation of Carlisle is an example of the backside costs of off shore sourcing/manufacturing. Starting around 2004 they have had considerable expense relating to claims and lawsuits relating to tires in the RV & marine markets. They are responding with the addition of plants stateside which is a good thing. I sincerely hope other manufacturers look to this example as motivation to bring things back here rather than suffer the same lessons. Don’t get me wrong. There are some high quality off-shore manufacturing examples but they are, in my opinion, the exception rather than the rule and are still subject to logistical issues.
    As far as your take on a manufacturing base as a community foundation, I cannot agree more strongly. Two small towns near here are suffering now. Millersburg, IN lost Carriage Inc and Wakarusa, IN is facing the loss of Utilimaster. The story in both cases is not what happened to these large (by community standards) manufacturing operations but rather what WILL happen to the smaller community business operations. What will become of the restaurants, hardware stores and gas stations that the local residents depend on? What happens when these businesses cannot remain within these communities either? In my opinion it will ultimately prove out your ‘house of cards’ analogy. Its hard to watch.

  2. [...] and relevant word press blog from Dean Barber of Barber Business Advisors, LLC. In the blog (Was Offshoring a Fad?), Barber explains the increasing trends of companies locating manufacturing operations in the [...]

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