Overseas oversold? Companies find onshoring makes financial sense

Posted on March 12, 2012

For manufacturing conglomerate TriMas Corp., the cost benefits of manufacturing in low-wage countries aren’t adding up.

The Bloomfield Hills-based maker of packaging, energy, aerospace, defense, oil and towing components has increased capacity at its plants in Indiana, Texas, Oklahoma and other U.S. plants — instead of overseas.

President Obama touted this practice, called onshoring, in this year’s State of the Union address. Experts say it’s more than a buzzword; it could help revive the country’s manufacturing base, as well as jump-start job growth in Southeast Michigan.

TriMas and other manufacturers are considering costs beyond labor, including supply chain risk, transportation and increased productivity through automation.

The bottom line? In many cases, the total cost of doing business shows companies are better off bringing jobs back to the U.S. TriMas is on the leading edge of this trend, which experts predict to hit full steam by 2015.

It remains to be seen exactly what the job gains will be in Southeast Michigan, but economic experts say multiple factors are at play. Combine costs trends with a weakened U.S. dollar, weakened unions and high unemployment, and manufacturing stateside begins to make sense.

TriMas decided to increase capacity and domestic manufacturing as part of a new model of assessing supply chain costs, said Dave Wathen, president and CEO.

“I’d describe the market as choppy, and there are ups and downs with what customers want because of the state of the economy,” he said. “This results in the supply chain becoming more of an issue, because nobody wants to miss an order or carry inventory.”

Over the next decade, business advisory firm Boston Consulting Group projects $100 billion in manufacturing will return to the U.S.

Rethinking costs

The motives for onshoring vary and are part of a complex methodology, depending on the company involved. Outsourcing and offshoring downsized blue-collar jobs in the U.S. to emerging markets like China, India and Brazil has been a trend since the mid-1990s.

Manufacturing operations in China enjoy a 55 percent cost advantage over manufacturing in the U.S., but growing labor costs in China and other low-cost countries are quickly diminishing that figure, according to Hal Sirkin, a Chicago-based senior partner and managing director for Boston Consulting.

Plus, China’s industrial subsidies, trade policies and the lack of intellectual property enforcement have created a rift in U.S.-based companies operating in the Asian nation. China has made agreements with other countries to better protect IP rights, but companies doing business there say it hasn’t enforced its laws and rampant infringement continues.

But it’s the rising wages in China that are driving manufacturers back to the U.S., Sirkin said.

China plans to increase wages across its manufacturing base by 15 percent annually and is quickly approaching $3 an hour for the average worker in some regions, compared with 58 cents an hour in 2001, Sirkin said.

The Chinese yuan is also strengthening, creating a flourishing working class — but a weak business plan for manufacturing and then exporting products from China.

Tom Aepelbacher, TriMas’ vice president of global sourcing and productivity, said the company has developed a new strategic vision on overseas manufacturing because of China’s growth.

“We used to get nice savings by sending work overseas, but those days are over,” he said. “We’re getting a lot smarter at our own manufacturing here, and we’re looking to aggregate lower costs here because we know costs are rising there.”

Nick Franklin, product line executive for Saginaw-based Nexteer Inc.‘s drivetrain division, said cost competitiveness has driven recent shifts in jobs for Nexteer.

In 2010 and 2011, Nexteer moved manufacturing capabilities from its plants in Brazil and Mexico to Saginaw.

The U.S.-Brazil exchange rate caused problems for Nexteer, which entered Brazilian to capitalize on low-labor costs, Franklin said.

The Brazilian real offered a 4-to-1 exchange when Nexteer entered Brazil. Now it’s reduced to a 1.8-to-1 rate, he said.

“The strengthening of the real drove up the prices of all commodities and parts,” Frankin said. “It now makes more sense for us to ship from the U.S. to Brazil. It’s cost effective even when we’re paying an 18 percent duty on our product (shipped to Brazil).”

Nexteer’s move created 100 jobs in Saginaw.

Risky business

Manufacturers also have discovered housing critical operations and jobs overseas can open the door to unexpected risks. And a broken link in the supply chain can take the whole manufacturing supply base to its knees.

The March 2011 earthquake and tsunami that devastated automaker and auto supplier plants in Japan revealed a major weakness. Plants across the U.S. were idled because parts weren’t available from Japan.

“Companies are now looking at supply chain risk as part of the puzzle,” said Dave Andrea, senior vice president, industry analysis and economics for the Troy-based Original Equipment Suppliers Association. “It’s all part of creating a more rational, pragmatic calculation as to what the real costs are for doing business in various countries, including the U.S.”

Shipping parts from overseas also poses a problem with the restructured automotive industry — where engineering changes occur at the drop of a sprocket.

“Classic costing models didn’t capture all the costs, like design changes,” Franklin said. “If I’ve got product on the water for six weeks, I’m six weeks away from implementing a design change. Customers won’t wait that long anymore.”

Automakers reconfigure their vehicles more quickly than in the past, looking for alterations every six months instead of every two to six years, said Mark Tomlinson, executive director and CEO of Dearborn-basedSociety of Manufacturing Engineers.

“Parts suppliers … have to be more agile in their approach,” he said. They have to manage that agility and put that into your manufacturing process, and a lot of times that means manufacturing locally.”

“I’d rather compete on speed than costs, and manufacturing locally allows us to move product quicker with fewer problems,” TriMas’ Wathen said. “We’ve reduced inventory, turnaround and sped up the supply chain. That creates a pretty strong case for strategically bringing (manufacturing) back.”

The risks of doing business overseas aren’t just limited to heavy manufacturing operations.

Copyright infringement in China became an issue for Southfield-based Mr. Song Millinery, said Luke Song, fashion designer and proprietor. Song began manufacturing hats in China in 2002 but soon realized his hat designs were being replicated and resold to his major customers at a lower price.

“People thought they were buying my hats,” he said. “I knew there were risks going into China, but by the time I realized them, it was too late. It’s a mistake I still regret.”
Song still acquires raw materials from China, but he manufactures all of his line in Southfield for the first time in a decade.

“I’d love to say it was because I wanted to revitalize the area, but it was simply a business decision,” he said. “I do everything domestic, because it’s something I can control better.”

Mr. Song Millinery employs 20 full- and part-time employees and sells an estimated 1,500 hats a year.

Cost of the open seas

Beyond the cost to build items, transportation costs are on the rise. A barrel of crude oil is over $104, up more than $40 a barrel since 2007. Shipping materials or products from overseas depletes margins at a rapid rate, said Guy Morgan, managing director and global operations advisory group lead of Southfield-based BBK Ltd.

In 2000, fuel represented 20 percent of freight shipping costs. Today, it represents nearly 50 percent, according to a U.S. Department of Transportation study.

Dan Falzon, business development manager for Canton Township-based logistics firm W.F. Whelan Co., said shipping a standard 40-foot container from China to Detroit costs an average of $5,000. In 2000, shipping between China and the U.S. cost an average of $3,000 per container, according to the DOT study.

“The cost of premium transportation was not considered in the past, and it makes no sense,” Morgan said. “If you’re smart, you’re no longer stampeding in chase of low wages, and instead (you’re) looking to build a widget within a 200-mile radius of your customer, get it at competitive wages and reduce your supply chain risk. Then you’ve got a winning cost model.”

Reaping the reward

Onshoring could create, or re-create, hundreds of thousands of jobs. Significant onshoring is expected to reduce the unemployment rate by 1.5 percent, according to the Boston Consulting study.

And further helping the case for onshoring is the productivity of the U.S. worker. For example, a U.S. laborer is 3.2 times to 3.4 times more productive than an average Chinese laborer, Sirkin said.

The reason? Automation.

U.S. plants use more machinery than plants in low-cost countries. Onshoring is already leading to increased automation, along with economic stability.

North American robotic orders were up 47 percent for automotive suppliers in 2011, a record high, according to statistics released earlier this month by the Ann Arbor-based Robotics Industries Association. Orders for non-automotive manufacturers grew 28 percent.

Matt Elliott, senior vice president and middle market banking executive for Bank of America in Detroit, confirmed that onshoring is slowly picking up speed in Southeast Michigan thanks to low interest rates and improving lending markets for capital equipment.

“It’s not happening on a large scale yet,” he said. “It’s been bringing back a program or two from overseas or adding a line, but plants are becoming more automated.”

Sirkin predicts the trend will accelerate in 2015, saying the “pendulum always swings, and it’s now swinging back.”

While a return of manufacturing will instill pride and is surely being used as a political device, it’s not about “Made in America” or national pride, Morgan said.

“Companies shouldn’t care about where products are made. They should care about making them competitively and … for the right economic reasons,” he said. “Right now, “Made in America’ makes sense.”‘

By Dustin Walsh, Crain’s Detroit