Bucking the decades-old wave of offshoring of manufacturing jobs to China, other parts of Asia and Mexico, GE said it would move jobs back from these countries to the United States, where it will build water heaters.
Jeffrey Immelt, GE’s chairman and CEO, notes that his decision to invest $1 billion in GE’s appliance business in the U.S. is “as risky an investment as we have ever made”. Yet, this brand of “re-shoring” – returning to the U.S. some manufacturing jobs that were earlier shipped overseas — is expected to pick up over the next several years as momentum shifts somewhat away from automatic decisions by U.S. manufacturers to operate lower-cost plants overseas. Factors encouraging this reversal include sharply rising relative manufacturing costs in China, accentuated by stagnant U.S. wages and productivity gains, steady renminbi appreciation, steeper transportation costs as oil prices rise and costlier maintenance of longer supply chains.
Hal Sirkin, a senior partner and managing director at the Boston Consulting Group, noted in this recent Knowledge@Wharton interview, that “wages are rising very quickly in China, somewhere on the order of 15% to 20% a year and maybe even higher. The renminbi … is rising at 4% a year.”
In February, GE Appliances announced it was opening a water heater plant at Appliance Park in Louisville, Ky., the first new plant at the site in more than 50 years. Eventually, GE plans to invest $800 million in Louisville, part of a $1 billion commitment to create 1,300 new jobs in the U.S. by 2014. Many of those jobs are being shifted from a water heater plant in China. In addition to standard manufacturing jobs, GE says the new facility will create “hundreds of highly skilled salaried jobs in fields like engineering, industrial design and manufacturing.”
So how big a trend might this re-shoring turn out to be? “Some jobs might return to the U.S., but not millions,” says Wharton management professor Marshall Meyer. “China now has an advantage in manufacturing infrastructure — both physical and human — for example, the availability of engineers. And countries like Vietnam and Indonesia will draw manufacturers seeking low-cost labor. Some Chinese companies are already outsourcing to Vietnam and Indonesia,” among other countries.
Wharton management professor Mauro Guillen points out that “Yes, because of rising wages and currency movements, Chinese costs are rising. And wait until the dollar takes a real hit. But keep in mind that other locations are now becoming attractive, for example, Vietnam and Bangladesh.”
Meanwhile, the evolving, global manufacturing landscape is turning up some valuable lessons regarding “the hidden costs of global supply chains, including their susceptibility to catastrophic collapse – such as in late 2008 — and to fuel prices today,” Meyer points out. Ocean shipping is one good example: “The carriers are all losing money, some [of them] billions, due to overcapacity and the high cost of bunker oil, which may go higher when they are forced to switch to low-emissions fuel. Inevitably, as in the airline industry, there will be industry consolidation reduced capacity, and much higher shipping prices.”
For Sirkin, though, the trend seems clear. “I think we’re still in the early stages. You see big companies like National Cash Register — NCR — that was manufacturing their ATMs in China for the U.S. and is now manufacturing in Columbus, Ga. You see Ford adding jobs into its plants. I think they committed to 12,000 jobs …. It’s also smaller companies. So Farouk Systems, which makes hair dryers, has moved 1,500 jobs back from China to the U.S. You see Coleman, the manufacturer of water coolers, starting to build water coolers in the U.S. ….”
And it some cases, it appears, companies are moving production back to the U.S, because they no longer want their designs and processes getting copied. Notes this Chicago Tribune article: Peerless Industries “decided in 2009 to buy equipment to make in-house its aluminum mounts that are used to fix flat-panel televisions to walls. The move followed nearly a decade of dealing with Chinese companies copying their products, said Michael Campagna, the company’s president and chief operating officer.”
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For further reading from Knowledge@Wharton Today: China’s Sinking Competitiveness
Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.