Thread: High costs force factories to bring jobs home

High costs force factories to bring jobs home
Jun. 13, 2008 10:38 AM
The Wall Street Journal


The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

"My cost of getting a shipping container here from China just keeps going up - and I don't see any end in sight," says Claude Hayes, president of the retail heating division at DESA LLC. He says that cost has jumped about 15 percent, to about $5,300, since January and is set to increase again next month to $5,600.

The privately held company, known for making the heaters that warm football players on the sidelines, recently moved most of its production back to Bowling Green, Ky., from China. Mr. Hayes says the company was lucky to have held onto its manufacturing machinery. "What looked like an albatross a year and a half ago," he says, "today looks like a pretty good asset."

The movement of factories to low-cost countries further and further away has been a bittersweet three-decade-long story for the U.S. economy, knocking workers out of good-paying manufacturing jobs even as it drove down the price of goods for consumers. But, after exploding over the past 10 years, that march has been slowing.

The cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel, says Jeff Rubin, chief economist at CIBC World Markets in Toronto. He estimates transportation costs are now the equivalent of a 9 percent tariff on goods coming into U.S. ports, compared with the equivalent of only 3 percent when oil was selling for $20 a barrel in 2000.

"In a world of triple-digit oil prices, distance costs money," Mr. Rubin wrote in a recent report. He figures that for every 10 percent increase in the distance of a trip, energy costs rise 4.5 percent.

Transportation costs are just part of a larger wave of inflation sweeping global manufacturing, which has also been pounded by higher costs for basic materials, such as steel and resins.

The cost of doing business in China in particular has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency has also appreciated against the dollar - though not as much as some critics contend it should - increasing the cost of its products in the U.S.

Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient Overseas Container Lines in San Ramon, Calif., a major shipping line, says he's heard from customers who are moving production back to the U.S., including a maker of steel pans for car engines.

"I believe a decent amount of production could come back into the States within five years, not everything," he says. "But it won't be because of transport costs - it'll be because other production costs have gone up and companies have realized they can have better control over their production when it's closer to home."

For many manufacturers, though, oil prices that have hurtled past $130 a barrel have been the tipping point.

Emerson, the St. Louis-based maker of electrical equipment, recently shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to offset rising transportation costs by being closer to customers in North America.

Edward Monser, the company's chief operating officer, says logistics costs, which include all the expenses associated with moving goods, became a worry about a year ago.

"That's when it became a dominant part of the discussion," he says, adding that oil then was less than $100 a barrel. "So with oil now at $130, it's even more serious." Mr. Monser says Emerson's larger strategy is to regionalize manufacturing, producing as much as possible within the part of the world where its sold.

But moving production closer to markets won't avoid all the problems associated with rising transportation costs. Manufacturers face hefty surcharges on domestic shipments by truck and train. And already congested domestic transportation systems may have difficulty handling a sudden upswing in demand from manufacturers buying and moving more raw materials and other supplies over U.S. rails and highways.

Moreover, in certain industries the advantages derived from offshore production continue to trump higher transportation costs.

Electronics firms, for instance, are now clustered in Asia and gain a major benefit of proximity to one another.

While many manufacturers are re-evaluating production strategies, there are limits to how many jobs will flow back to the U.S. One problem is that much of the basic infrastructure needed to support many industries - such as suppliers who specialize in producing parts or repairing machines - has dwindled or disappeared.

U.S. job losses in manufacturing have averaged 41,000 a month so far this year - nearly double the pace last year, with sectors such as autos and construction materials tied to the housing slump especially hard hit. In essence, every job added as a result of companies pulling work back home is being more than offset by others reeling from the domestic slump.

Higher fuel costs "may slow the outsourcing of goods in the future, rather than causing a massive shift back of those things that have already been outsourced," says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public policy group in Arlington, Va.

A prime example is Craftmaster Furniture in Taylorsville, N.C. The company, bought two years ago by a Chinese manufacturer, once intended to shift 40 percent of its U.S. production to China by the end of this year or early next year. With the planned move only about half done, that exodus has stopped cold.

"We're getting hit with increases up and down the system," says Roy Kalcain, the company's president. "It's changing our whole equation for where we produce." As recently as a year ago, Mr. Kalcain says he was saving 15 percent when he assembled sofas in North Carolina using kits of fabric that were pre-cut in China. Those savings are now only 7 percent or 8 percent.

When savings fall to far less than 15 percent, it gets harder to justify having the work done in distant Chinese factories that take 12 weeks to deliver products.

The higher costs are particularly problematic for lower-value goods: The cheaper a product, the more significant transportation costs are in the final price. That may help explain why Chinese exports of such "freight-sensitive" goods to the U.S. are now falling for the first time in more than a decade, according to CIBC's Mr. Rubin.

Bremen Castings Inc., a family-owned foundry in Bremen, Ind., is seeing a wave of customers bringing work back from China and other low-cost countries.

Last month, a pump manufacturer, which had moved more than $1 million worth of metal-casting work from Bremen to China two years ago, called "to reactivate everything," says J.B. Brown, the foundry's president. "They told me the cost of transport from overseas was the straw that broke the camel's back - and they said they didn't see it going back down any time soon."

And the heavier and bulkier goods are, the more sensitive they are to fuel costs. CIBC's Mr. Rubin predicts Mexico will be "the biggest winner of all" as increased transportation costs make China uncompetitive in an ever-growing list of businesses in North America. Even Mexico may be too far for some companies.

Last fall, Crown Battery Manufacturing Co. decided to close a plant it bought in Reynosa, Mexico, and move the jobs to its Ohio home base, adding 25 workers to the 400 it already employed.

"We're shipping batteries, which are big and heavy," says Hal Hawk, the company's chief executive.

Mr. Hawk estimates shipping to customers, who tend to be clustered in the Midwest, was adding 5 percent to 10 percent to the cost of the Mexican-made batteries, which he says also suffered from quality-control problems. The smallest batteries are 20-pounders for lawnmowers, but they also make 29,000-pound giants for running underground mining machines in places like southern Illinois.

"They were traveling 2,000 miles to get to those major customers," says Mr. Hawk, and all indications are that fuel surcharges on the trucks would just keep growing.







http://www.azcentral.com/news/articles/ ... bs-13.html

I happened to catch an interview with a guy who is a transplanted Irishman who now works at a Bay area progressive think tank on a local radio program a few weeks ago.

His basic thesis or argument was this:

"Globalization is bad, and will be fading in the future"
Because... largely, the total and relative cost and availability to make the economic feasibility to produce things in remote places and ship them large distances will become unsustainable for most of the world's economies.

As a parallel corollary, it is also advantageous and desirable for local people to produce local goods for local consumption. That is good for the local workers and consumers. Of course, relative resource availabilities and economic wealth play into this equation, but I believe what he is says makes a lot of sense and I believe we are beginning to see the leading edge of how the future is likely to unfold.

The current trend in energy prices and availability as plays into the global trade picture is validated in the story above by this researcher's argument.
So, I guess for some people at least, there is a silver lining to $4.00/gal gas...


Oh, BTW, his name is Julian Carly (sp?). Very interesting guy. Give him a listen if you every have the chance.

Ya pay the piper one way or another. I don't know why these idiots didn't think of this first. I thought that was what the plan was......share the wealth and jobs, not take away from one and give to another while the greedy profit on whatever the temporary windfall was. Open a Ford factory in South America or China...fine...and sell the product there. Not close everything here and go there and expect us to still pay top dollar and fund the rest of the added expense of having it sent back here. We don't have to totally loose everything in order to be "global". Dugh. Have some of your foreign service people work in India....dealing with the people there, and let us have some here to help us. Ones we can understand. Let us import what we don't have here like an abundance of bananas and ship out what we grow here that they don't have.....like apples or something. No country should be totally dependant on another for the basics of life they are capable of producing for themselves. If they want lead in Barbie in
China because they don't care.....fine. Just can't ship it here and wouldn't need to because we'd be making our own. Mexico doesn't mind a little salmonella in their tomatoes....fine...you eat them. They are going to have to up-grade their products and pay or they won't be competative in the "global market".....instead of this how low can you go junk.

GOOD NEWS!!!! Lets hope it all comes back.

This shows that maybe there are some holes in CFR's big plan for globalization . Maybe they're not as smart as they thought.

"also suffered from quality-control problems."

Maybe one of these days, ALL the manufacturers who have shipped the jobs out of the U.S., will FINALLY figure out that AMERICANS make the BEST PRODUCTS and bring it all back.

Maybe one of these days, ALL the manufacturers who have shipped the jobs out of the U.S., will FINALLY figure out that AMERICANS make the BEST PRODUCTS and bring it all back.

Only when it hurts their bottom line hopefully that will be soon.!!!

" Mr. Hawk estimates shipping to customers, who tend to be clustered in the Midwest, was adding 5 percent to 10 percent to the cost of the Mexican-made batteries, which he says also suffered from quality-control problems. The smallest batteries are 20-pounders for lawnmowers, but they also make 29,000-pound giants for running underground mining machines in places like southern Illinois. "

Its a hell of a lot easier to tell the company owners that the shipping costs are too much then to have to admit that their products quality now sucks and there's nothing they can do about it.

Originally Posted by PhredE

I happened to catch an interview with a guy who is a transplanted Irishman who now works at a Bay area progressive think tank on a local radio program a few weeks ago.

His basic thesis or argument was this:

"Globalization is bad, and will be fading in the future"
Because... largely, the total and relative cost and availability to make the economic feasibility to produce things in remote places and ship them large distances.

As a parallel corollary, it is also advantageous and desirable for local people to produce local goods for local consumption. That is good for the local workers and consumers. Of course, relative resource availabilities and economic wealth play into this equation, but I believe what he is says makes a lot of sense and I believe we are beginning to see the leading edge of how the future is likely to unfold.

I have always wondered when the bottom would fall out from under this totally bizarre idea to move our jobs and products to distant countries.

My thought has always been "who is going to have enough money to buy their products which they ship back to us if we don't have jobs to pay for them" ?

The tradition of producing and selling locally has now been tested and proven to be a sound idea.Hurray Hurray

They finally woke up and realized cheap labor isn't exactly cheap now, is it?