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

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

Seagate Wuxi China Factory Tour photograph from November 2008. (Robert Scoble, Robert Scoble via flickr) Seagate Wuxi China Factory Tour photograph from November 2008. (Robert Scoble, Robert Scoble via flickr)

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.

When Mikel Schwarz founded his undershirt business, RibbedTee, in the spring of 2008 he tried using manufacturers in Los Angeles and in China. (SpydermazeStudios.Com) When Mikel Schwarz founded his undershirt business, RibbedTee, in the spring of 2008 he tried using manufacturers in Los Angeles and in China. (SpydermazeStudios.Com)

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.

Michel Janssen is the principal and chief research officer at The Hackett Group, a global strategic advisory firm. (The Hackett Group) Michel Janssen is the principal and chief research officer at The Hackett Group, a global strategic advisory firm. (The Hackett Group)

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.

Lew Cramer is President and CEO of World Trade Center Utah (Michael De Groote, Deseret News) Lew Cramer is President and CEO of World Trade Center Utah (Michael De Groote, Deseret News)

"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."

When Mikel Schwarz founded his undershirt business, RibbedTee, in the spring of 2008 he tried using manufacturers in Los Angeles and in China. (SpydermazeStudios.Com) When Mikel Schwarz founded his undershirt business, RibbedTee, in the spring of 2008 he tried using manufacturers in Los Angeles and in China. (SpydermazeStudios.Com)

For Schwarz, the only tradeoff is that it is more expensive to manufacture in the United States. He says people also will run into some of the same problems he had with manufacturing in China. "We are talking about human beings," he says, "Similar processes are used around the world."

But in the U.S., he says he could get in a car and inspect the product as it is being developed and made. The language is the same and communication is quicker.

Schwarz's situation is manufacturing on a small scale. He was outsourcing part of his manufacturing to China and outsourcing part of it to manufacturers close enough for him to drive to in Los Angeles.

Offshoring usually involves moving company operations overseas.

Reshoring is bringing them home.

Plugging the leak

"The big picture is we have equalized the amount of work that is going offshore with the amount of work that is coming on shore," Janssen says. "That is a good thing. It isn't quite what the politicians would have you believe."

"The need to move away from the U.S. is slowing down."

Cramer at World Trade Center Utah says reshoring is especially attractive to those businesses where cost is not as important as quality, timeliness and protection of intellectual property, Cramer says.

"If it is a commodity, 'Hey, I'll go to Uzbekistan, Vietnam, wherever,'" Cramer says. "Those folks are less likely to do it. … It's a cost deal."

Another reason to reshore is to protect intellectual property, Cramer says. "Because you can use U.S. laws to ensure that counterfeiting doesn't take place," he says.

The great scale of China

One thing you will not see, according to Janssen, is Apple moving the manufacturing of millions of iPads to the U.S. America just doesn't have the capacity to manufacture at this scale. "Think about it," he says. "Is there anyplace in the U.S. where you could say, 'I need a million people working on the rollout of this project'? You probably couldn't get 5,000 people to do it in the U.S. And they wouldn't want to work in those kind of conditions, either."

On the services side, however, the story is different. "We are still losing tons of jobs," Janssen says. "We are losing millions of jobs in the back offices of corporate America."

"Manufacturing side has less bad news," Janssen says, "but the services side still has a long way to go."

Service jobs include things such as accounting, customer service, marketing, sales, — the intangible things people do to keep a company going.

Services are more vulnerable because it simply a question about the cost of the labor. There is no shipping involved. The Internet eliminates any time differences (the foreign workers can keep Eastern Standard Time business hours). Janssen says many of these foreign companies have more than a decade of experience in the services industries. "Anything you can do in a U.S. corporate office, except highly specialized functions, you can now do in low cost locations," Janssen says.

The appeal of China for those interested in outsourcing is hard to let go of. A few years after his first experience, Schwarz decided to try China to manufacture a new tank top undershirt. His company went back and forth through the product development phase with a company in China. Finally the production sample of 10 shirts was in a box sitting on his desk. "I was excited," he says.

When Schwarz opened the box and looked inside, his excitement turned to dread. The shirts were packaged in foggy, dirty, old plastic instead of bright clear packaging. "It looked like it had been sitting in a warehouse for years," he says. "The packaging was grotesque."

Schwarz told himself that all entrepreneurs run into roadblocks and nothing is perfect out of the gate and even though the packaging was not what he had hoped, there was no reason to overreact.

He took one of the undershirts out of the package. It looked good. Maybe things would be fine after all. He walked into a fitting room and pulled the undershirt over his head. As he did so, he heard the unmistakable sounds of threads ripping apart around the bottom of the shirt. The factory in China stitched the shirt the wrong way and the bottom was loose. "This was severely wrong," he says. "I was worried that they may have moved on with the production run before getting the OK from me."

An email to the company in China confirmed his fears. The production run was done. Thousands of wrongly stitched undershirts were sitting in grotesque packaging awaiting shipment to the U.S.

Schwarz refused delivery rather than pay the money for shipment for product he couldn't sell. He lost his deposit.

But he kept his "Made in U.S.A." labels. The undershirt would have to be made in Los Angeles.

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