‘Total cost’ tilts manufacturing equation toward United States
by Ted Carter
Published: August 26,2012
Nearly every third day this year retired manufacturing executive Harry Moser expects to be in a city somewhere in America urging business leaders to go toe-to-toe with China on making the products desired by U.S. consumers.
Moser’s message goes something like this: You’re the home team on a playing field that is growing more level by the day. China is losing claim to being the low-cost option and the headaches of doing business there are only getting worse.
Today, America can grab back a quarter of the 2.8 million manufacturing jobs it has lost to China, Moser said on a stop last Monday at Mississippi State University’s Franklin Furniture Institute, where he brought his reshoring message to about 100 business and civic leaders.
“We’re not suggesting the U.S. should make toasters and ship them to England,” he said.
The suggestion is that the United States make toasters for U.S. consumers, added Moser, a former president of Illinois-based Charmilles Technologies Corp. who launched his crusade to bring America’s manufacturing home out of frustration with the loss of the 100-year-old Singer sewing machine plant in his hometown of Elizabeth, N.J., to low-cost competition from Japan.
He has 120 speaking engagements scheduled this year on behalf of the Reshoring Initiative, a non-profit effort sponsored by 28 manufacturing associations and companies.
Central to Moser’s idea of restoring America’s manufacturing prominence is that the “total” cost of making products in the United States for domestic consumers is quickly catching up with the costs of manufacturing the same products in China. Look for a “convergence” of total costs by 2015, says Moser, quoting The Boston Consulting Group’s “Made in America Again” report that forecasts within three years Mississippi and other Southeastern states will be on an equal manufacturing-cost footing with China.
The 2015 convergence is predicted to shift further into the favor of U.S. manufacturing as time goes on, with projections that China will lose 10 percent of its cost advantage in each of the first several years beyond 2015, according to Moser.
More specifically, according to Moser, a company that spends $98 on a manufacturing unit in China would spend $108 in the United States. Bringing in the cost of shipping, warehousing of inventory and risks and liability brings the offshore and domestic manufacturing costs close to convergence even now, he said.
“I project that 25 percent of what has been offshored would be reshored if we could get companies to use total cost instead of price in making their decision,” the founder of the Reshoring Initiative said in an hour-long talk at the Franklin Institute’s “Reshoring, Retaining and Growing Mississippi’s Manufacturing Jobs” conference.
The “Total Cost of Ownership Estimator” is a key element of Moser’s campaign to convince the business world that total cost should out weigh the “cheapest price” in making sourcing decisions. It’s on the Reshoring Initiative’s web site at reshorenow.org and lets users plug in often ignored costs such as carrying higher inventory levels, shipping, travel, intellectual property risks and the shortfalls in innovation that occur by separating manufacturing form engineering.
Moser’s “Estimator” has drawn interest in Washington, where the House Appropriations Committee has directed the Commerce Department to develop one.
“So many companies have looked only at cost,” causing them to overlook “20 to 30 percent” of the true cost, Moser said. “They made a decision thinking the cost was 10 percent but it was really 13 percent.”
This would typically occur with a CEO who has had a bad quarter and feels the pressure from investors to “fix the problem,” Moser said.
The typical “fix” is to offshore 30 percent of the production of the product line, he added. “The reality is that they probably improved the margin because the margin is calculated based on price… but they made the overhead worse. Their delivery got worse, their quality went down, their reputation went down. Their profits didn’t necessarily improve.”
With that result in mind, Moser said, “We’re trying to get them to make a decision base don the bottom line and not just the margin.”
On the horizon
Some manufacturing categories are more prime for picking off than others, according to Moser, who noted that a few trends can be detected from the 50,000 manufacturing jobs that have been reshored in the last two to three years. Among these “tipping point” industries are machinery, appliances, chemicals, oil and gas, and wood products, including furniture.
“Clothing and textile are starting back but they will be the hardest thing to bring back,” Moser said.
He estimates that reshoring accounts for10 percent of the total increase in manufacturing jobs in the United States since 2010. For the first time, as many factory jobs may be returning as leaving, Moser said. “My best estimate is that the number of jobs offshored approximates the number reshored in the last two to three years.”
Moser said he calculates that 63 percent of those that have recently gone offshore would have stayed had they looked more closely at total costs.
Look for that balance to shift even further to the domestic side if a recent survey by the Massachusetts Institute of Technology is on target, Moser said.
In a survey of companies with offshore operations, MIT found that 37 percent of them are considering bringing their manufacturing home and another 14 are “definitely planning” to bring the jobs home.
Forty percent of the survey companies had already done some reshoring work in the United States, according to MIT. “My guess is the real number is higher,” Moser said.
Some of that planning for reshoring is driven by changes in how American buyers view U.S.-made products. “The percentage of U.S. consumers who view products made in the America favorably is up from 58 to 70 percent,” Moser said.
Moser lists some big names among the companies that have returned at least some of their manufacturing to the United States, chief among them Ford, General Electric, Caterpillar, DuPont and Stanley Furniture.
Ford brought back a variety of products manufacturing after giving up on a plant in China that would lose 25 percent of its workforce each year after workers departed for an annual holiday and did not return.
GE is investing $800 million relocate its water heater manufacturing from China to Louisville, Ky., in a move that will create 600 jobs. Engineering, machining and marketing departments got together and “kicked $20 out of the cost of the unit,” Moser said. “China was still 3 percent lower but when they looked at the total cost, the Chinese cost was 6 percent higher.”
Stanley Furniture made a return from China and Vietnam partly on the prospect of marketing a product “100 percent” made in the United States, Moser said. The company also would no longer need large inventories or to deal with uncertainty over the arrival of product shipments, he said. “This gave them the ability to respond quickly to changes in the market.”
Caterpillar, meanwhile, is bringing excavator building jobs to Texas from China and small tractor manufacturing from Japan to Georgia.
Others that have brought manufacturing jobs home include Coleman (making coolers in Wichita, Kan.); National Cash Register (making ATMs in Columbus, Ga.); Excell Outdoors (making outdoor gear in Haleyville, Ala.); Suarez Manufacturing Industries (making portable heating systems in North Canton, Ohio); and, Wright Engineered Plastics (making molded plastic parts in California).
Moser’s favorite returnee?
WHAM-O, maker of the Hula-hoop and Frisbee. “They brought back 60 percent of their Frisbee and Hula-hoop production to California and Michigan.”
If those two high-cost states can grab Frisbees and Hula-hoops from offshore, “you can bring anything back to Mississippi,” Moser said.
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