Is It Time for U.S. Companies to Reinvest in Domestic Manufacturing?

Ann All

Three months ago I wrote a post about some of the cost/quality tradeoffs associated with globalization. I discussed some of the continuing product quality and intellectual property issues with goods manufactured in China and wrapped with a question: Will Western companies continue to invest there, to produce goods for domestic sale and also to tap into China's burgeoning consumer market? As China's cost of production rises, will they move work to lower-cost (and even less regulated) countries like Vietnam and Sri Lanka? Or will they consider investments that could pay off in enhanced U.S. manufacturing competitiveness?


It's pretty unrealistic to expect companies to consider those types of investments for purely altruistic motives such as boosting America's long-term competitiveness. But what if the companies themselves could enjoy direct benefits?


An interesting strategy+business piece describes how several U.S. companies, including NCR Corp., have returned at least some of their manufacturing operations to the United States to keep closer tabs on quality. It's tough to maintain control over the manufacturing process when working with multiple contractors and sub-contractors in far-flung locations, as companies like Boeing have learned.


Proximity creates an even bigger benefit, according to Peter Dorman, NCR's senior VP of global operations. Designers, engineers, IT pros and customers are all kept in the manufacturing "loop," which helps the company respond to market needs more quickly. Said Dorman:

... With this new approach we're taking, we can get innovative products to the market faster, no question.

In an earlier post, I cited remarks from General Electric CEO Jeff Immelt about the need for American companies to refocus on domestic manufacturing and R&D capabilities. I was particularly taken with his statement that "We must end the impression that American CEOs are short-term speculators." Immelt is putting his money where his mouth is. According to the strategy+business article, GE plans to construct two new U.S. plants: a factory in Schenectady, N.Y., to make high-density batteries and a facility in Louisville, Ky., to produce hybrid electric water heaters that are currently produced in China.


While the article notes backshoring is far from a widespread movement, with many companies continuing to move jobs to lower-cost countries like China, it also can't be dismissed as a short-term fad. The cost incentives to offshore aren't as strong as they used to be, thanks to rising labor and raw materials costs in places like China.


The article points out California-based Wright Engineered Plastics which makes injection molds, has expanded its domestic operations and decreased its use of Asian facilities because many of its key customers have shifted their own manufacturing facilities back to the United States in response to rising costs for raw plastic in China. In 2008, I wrote about a study that found rising freight costs, combined with factors such as wage inflation in Asia, made nearshore locations like Mexico or even the United States more cost-effective sites for manufacturing some products.


This won't always result in more American jobs, at least not right away. The article mentions Diagnostic Devices, a maker of blood glucose monitoring systems that is moving a manufacturing line to North Carolina after concluding a five-year agreement with a Chinese contract manufacturer. The company plans to cut its production budget by 40 percent by automating much of its U.S. operations and by taking advantage of lower shipping fees for its mostly local customers.


Ultimately, automation means more high-skills jobs for folks designing sophisticated hardware and software, but fewer jobs on manufacturing lines. In the near term, U.S. manufacturing workers will need to be trained in automation-driven technologies.


Staffing up with the right skills in the United States isn't the only challenge associated with bringing outsourced tasks back in-house. In a post about the challenges, I cited remarks from PA Consulting Group's Scott Lever, who said moving operations in-house is "at least as complicated as the original outsourcing."


That post also included thoughts from Seattle Post-Intelligencer columnist Bill Virgin. Unless U.S. companies are careful, Virgin wrote, they may find they have "off-loaded not just work, jobs and costs, but expertise, intellectual property and, eventually, customers and orders as well."

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