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Farewell to China: U.S. companies coming back home

Published: Friday, May 24 2013 4:45 p.m. MDT

LOS ANGELES — When Mikel Schwarz founded his undershirt business, RibbedTee, in the spring of 2008, he tried using manufacturers in Los Angeles and in China.

Schwarz's first attempt at outsourcing didn't go well. The shipment came and looked fantastic. "If you put the product from China next to the product from the United States, they looked very similar," he says.

But the China shirts didn't shrink the right amount after the first wash. If the U.S.-made and China-made undershirts were sold togethter, some would be too baggy. Schwarz had to sell the 6,000 baggier undershirts from China as a different product line. "If I had a representative in China, they could have done the product verification before the final run," he says.

For years, China has held out the promise to small and big businesses of being the low-cost solution for all their manufacturing needs. In 2005, according to a study by global strategic advisory firm The Hackett Group, manufacturing in China was an awesome deal. In 2005, it cost 31 percent more to make something domestically than to have it made in China.

Things have changed over the last eight years. Now the cost gap has shrunk to 16 percent, which is close enough to start a reverse in the direction of manufacturing being done overseas. Companies are bringing manufacturing jobs back to the U.S.

"Sixteen percent just happens to be the threshold where companies will start to look at (whether they want to continue to) go through the pain of shipping stuff halfway around the world," says Michel Janssen, principal and chief research officer at The Hackett Group.

Some of that inconvenience includes headaches such as investing money and the dangers and legalities of protecting intellectual property like patents.

This doesn't mean China is on the way out; 75 percent of the companies The Hackett Group surveyed last year said they have manufactured products in China for at least three years. But the offshoring leak has turned into a reshoring trend.

Labor pains

Lew Cramer, president and CEO at World Trade Center Utah, often runs manufacturing roundtables where company representatives talk about offshoring to China. When Cramer asks if anybody has considered reshoring their business, he says that everybody is at least considering it. "Fifteen out of 15 will say 'Yes, we have,' he says. "Everybody is thinking about it whether or not they've done it."

Cramer lists the reasons why some companies are considering bringing manufacturing home. First, wages have gone up in China. Second, companies are concerned about protecting their intellectual property from being taken. There are also fewer supply chain disruptions when manufacturing is done closer to the markets. And finally, they want to be closer to their customers.

"Cost may be in the top five of the list," Cramer says, "But it is not always number one."

The total cost of any manufactured product has a lot more going into it than just the physical costs to make the item. Businesses look at something called "total landed costs." What this basically means is they add up everything that it takes for a product to land at the market. This can include the original cost of the item, including materials and labor, brokerage fees, logistic fees, shipping, customs duties, taxes, tariffs, currency exchange losses or gains, insurance, travel costs for staff and a host of other things.

The cost of labor needs to be really low to overcome all the other costs of manufacturing overseas.

The biggest problem Schwarz ecountered in China wasn't the quality of the product, but the overall experience involving difficult communication and how everything seemed to take longer. "It was hard to describe what we were looking for in a way they could understand," he says, "A process that would take three weeks here would take three months in China."

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