Manufacturing jobs find way back to U.S.

‘Insourcing’ gains as employers cite high shipping costs and quality control

Written by
Dean Calbreath

In a small industrial building near the Crossings shopping center in Carlsbad, a hundred factory workers at Outsource Manufacturing Inc. are producing and assembling medical devices, consumer gadgets and parts and supplies for other manufacturers.

Over the past couple of decades, much of this type of work has been shipped out of the country, to factories in places like Mexico, China, Vietnam or Thailand. But recently, manufacturers have been bringing some work back to America. They call it “insourcing,” rather than outsourcing to foreign lands. Or “reshoring,” rather than offshoring.

“Reshoring is happening,” said Ted Fogliani, who heads the firm. “When you look at the full cost of doing business abroad, U.S. factories can compete on price, delivery and quality. People would be surprised to learn how many things we still manufacture in the U.S.”

In recent weeks, the idea of insourcing has been in the spotlight, with President Obama touting it as a way of creating jobs in the United States. “It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America,” he said last month, unveiling a package of tax incentives that he hoped would turn the tide.

Many companies have already brought production lines back from foreign lands, breathing new life into long-ailing U.S. factories.

Coleman Co., for instance, has shifted its production of plastic coolers from China to Kansas because of rising labor costs. Outdoor GreatRoom brought its production of fire pits and pergolas back to Minnesota because of the lag time in getting shipments from China. Peerless Industries is moving its audio-visual mounting systems from China back to Illinois, so it can have more control over the manufacturing.

A study by the Boston Consulting Group last summer projected that the trend will increase over the next several years, eventually generating between 2 million and 3 million jobs nationwide, including service jobs that support the factories.

The upper end of that estimate represents about half the factory jobs that have been lost since manufacturing peaked in 1999. Chula Vista electronics manufacturer and business advocate Michele Nash-Hoff, who has written extensively on manufacturing policy, said she thinks factories could regain 25 percent to 30 percent of the jobs that they lost nationwide and maybe 10 percent to 15 percent in San Diego County, amounting to roughly 3,000 to 4,500 workers.

What it means to San Diego

Nash-Hoff sees lower growth in San Diego because so many local factory jobs have been “near-sourced” to Tijuana, where they are likely to stay. But she says that there’s already increasing demand for local factory workers, to the extent that some factories are finding it hard to fill openings requiring specific skills.

“We need to institute more apprenticeship programs to address that problem,” she said.

Skeptics say that despite the recent insourcing, many U.S. firms will keep producing their goods abroad. Last year, imports of manufactured goods from China increased by $30 billion, including many goods produced by the offshore factories of such U.S. companies as Disney, Motorola and Apple.

6 a.m., Feb. 18, 2012

“Happy talk about insourcing (cannot) overcome the damage from decades of reckless trade expansion with protectionist, export-obsessed economies in Asia, Europe, and Latin America,” said Alan Tonelson, research fellow at the U.S. Business and Industry Council.

Tonelson said the government needs to revamp trade policies to ensure that U.S. factories are on a more even playing field with foreign plants.

But manufacturers say the playing field between the U.S. and China is already getting more even, thanks in part to rising labor costs. As recently as 2000, Chinese workers averaged only 72 cents per hour, but by 2015 they are projected to be making $6.31, according to the Boston Consulting report.

That’s still far cheaper than U.S. workers, who are projected to average $24.81 even in low-cost states in the Deep South, the report says.

But when factoring in such things as productivity and shipping costs, as well as the hassles of dealing with a foreign bureaucracy, the threats to intellectual property and the logistical headaches of overseeing a workforce thousands of miles away, the rising costs are enough to whittle down the advantages of doing business in China.

How can US compete?

“People ask us how we can compete with China labor — and the fact is, we can’t,” said Fogliani, a contract manufacturer who produces goods for clients who can’t handle the production themselves. “We compete on other things: the cost of freight and customs duties and the time involved in having your products come in on a boat.”

And then there is the question of quality.

“I’ve witnessed too many guys jumping way ahead of themselves by producing things in China,” said Adrian Pelkus, head of A Squared Technologies, a contract manufacturer in San Marcos. “They often end up getting a boatload of flawed parts, and they can’t get any tweaks or changes made to the products and they can’t get their money back.”

One of Pelkus’ clients brought him crateloads of medical devices made in China that had to be taken apart and reassembled because of a mistake in one of the device’s tiniest parts. Another client hired him to assemble medical pumps with parts shipped from China. But when the parts arrived, they were so flawed that the project was temporarily canceled.

“I had hired 22 people to work on that project and we were ready to run in two shifts, but the whole thing crashed because we didn’t get the quality parts necessary,” he said. “There were 400 separate parts in the device, and most of them had to be remade. If they’d been made in the U.S., things would’ve been different.”

The project eventually went ahead. But even then, there were so many problems that Pelkus says he barely broke even.

Fogliani said that it’s not that the Chinese are shoddy workers. Part of the problem has to do with communicating in two languages over long distances. “U.S. companies can make mistakes, too, but here you have a better chance to catch them relatively early in the process, instead of paying for 50,000 pieces to be shipped across the ocean,” he said.

Insourcing won't replace all lost jobs

Despite the growing disadvantages of manufacturing overseas, nobody expects that the United States will ever regain all the factory jobs that have migrated abroad.

Such major firms as General Motors, Nike and Disney will likely keep their manufacturing operations in China because they have found a growing market among Chinese consumers — and they exert enough firsthand control over their operations to keep glitches to a minimum. Despite the glitches, many smaller companies may keep their facilities in China because of the costs involved in disrupting and reshaping their supply lines.

“It’s not easy to bring factory work back to this country,” Fogliani said. “It’s much easier to start it here.”

Pelkus said his main goal is to reach out to new entrepreneurs to “teach them right up front that they can keep their factories and jobs here in San Diego.”

The Obama administration is trying to use tax policy to encourage companies to bring their operations back to the United States, including putting an end to tax breaks for companies that move abroad and granting tax breaks that companies that “reshore.”

Nash-Hoff said that many of the president’s initiatives are a step in the right direction, but “what we need is an all-encompassing national manufacturing strategy.”

Fogliani said the best thing that might come from all the talk of reshoring would be to encourage U.S. manufacturers to look for partners at home before going abroad. Fogliani said one of his customers was shocked when he told her that his firm could do the work that she was considering doing in China. She had not even bothered getting price quotes from U.S. factories because she thought they could not come close to matching Chinese production costs.

“I told her people should always get local quotes for their products,” he said. “It doesn’t mean you have to use local sources, but it doesn’t cost you anything to get quotes. The U.S. can compete with foreign manufacturers. We do compete.”

Obama’s insourcing proposal

Last month, the White House announced a series of measures to encourage companies to keep their factories in the United States instead of relocating abroad. The proposed measures would:
•Eliminate deductions for moving their operations offshore.
•Give a 20 percent income tax credit for the expenses of moving operations back to the U.S.
•Double the current 9 percent deduction on domestic production activities to 18 percent for advanced manufacturing.
•Provide $20 billion worth of temporary tax credits to drive domestic clean energy manufacturing, including production of new windmills and solar panels.
•Reauthorize a temporary tax cut that allows businesses to expense the full cost of their investments in equipment.
•Close a loophole that allows companies to shift profits overseas.
•Make companies pay a minimum tax for profits and jobs overseas.
•Make permanent an expanded tax credit for research and experiments conducted within the United States.
•Crack down on U.S. citizens and companies who use foreign accounts and foreign tax credits to inappropriately avoid U.S. taxes.

Manufacturing jobs find way back to U.S. | UTSanDiego.com