Insourcing & Reshoring

A number of companies are bringing manufacturing jobs back to the US. Could this practice spread to other specialties?

For the last few years a trickle of jobs, long ago sent overseas, have been returning to US shores. Inc. Magazine points out a study last year by Accenture in which 287 manufacturing executives across a range of industries admitted to having broadly underestimated of the costs of going offshore to assemble goods for sale in this country, when the decisions to offshore had first been made.

The Atlantic brings this trend up to date with a long profile of the massive GE manufacturing facility in Louisville, KY, the 60-year-old "Appliance Park," that is slowly coming back to life. New assembly lines are being added in buildings that have been shuttered for decades.

GE is spending $800 million to breathe new life into Appliance Park. "I don't do that because I run a charity," GE's CEO, Jeffrey Immelt, said a couple of months ago, as reported by The Atlantic. "I do that because I think we can do it here and make more money." And last spring Immelt had signaled this shift (The Atlantic calls it a "pirouette") when he declared that outsourcing is "quickly becoming mostly outdated as a business model for GE Appliances."

Root causes
A number of factors are behind the new math of "insourcing":

• Oil costs three times what it did in 2000, so shipping finished goods back from China makes less sense.
• Natural gas to power factories is cheap here.
• Wages in China are some five times higher than they were a decade ago, and are projected to rise 18 percent a year for the near future.
• US unions are far more accommodating than they were in the decades when offshoring was king.
• Productivity has risen so much that labor now accounts for a much smaller fraction of the cost of manufactured goods.

But another factor might be more important than all of these: the spread of lean manufacturing out of its US beachhead in the automobile industry. The Atlantic describes the process GE went through when bringing the GeoSpring water heater back to Kentucky for manufacture. Instead of simply putting up an assembly line to make the exact same product, GE put in the "big room" design engineers, manufacturing engineers, line workers, and marketing and sales people. They ended up redesigning the GeoSpring from the ground up.

The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up. GE wasn't just able to hold the retail sticker to the 'China price.' It beat that price by nearly 20 percent.

GE isn't alone. The Atlantic notes similar moves by Whirlpool, Otis, even Wham-O the frisbee maker. And, intriguingly, there are indications that Apple has a toe in these waters. Some customers who have bought new 21" iMacs are reporting that the little plaques on the back of their new computers reads "Designed By Apple In California, Assembled In USA."

Could reshoring spread beyond manufacturing to other specialties? Technical specialties, perhaps? It's not impossible, but the labor cost equations aren't as favorable for knowledge workers. However, the advantages of increased communication, collaboration, and process improvement should be as compelling in technical occupations as in manufacturing. As US manufacturing absorbs the lesson that, as The Atlantic puts it, "the offshoring rush of the past decade or more -- one of the signature economic events of our times -- may have been a mistake," perhaps other segments of the economy can do likewise.