Insourcing

[Reeve]

So I've read a few articles lately talking about the trend towards insourcing - the movement of manufacturing jobs back to the US from overseas manufacturing centers. GE, for example, has recently moved 3 major product lines back to US manufacturing from China and Mexico. The CEO of GE is saying that he considers manufacturing offshoring to be largely obsolete for GE going forward, and that more product lines will be coming back to the US. Apple is moving some of their manufacturing back to the US, and even the Chinese company FoxConn is opening up manufacturing facilities in the United States.

The reasons for this are several:

1. The cost savings from offshoring aren't as great as once thought.
2. Wages overseas are rising at a rapid pace. Chinese wages have been increasing 20% year over year.
3. Having design, engineering, and manufacturing all in the same place, and within easy reach of the target market, has huge advantages from a business standpoint. Having workers on the manufacturing floor able to talk to the product designers has a big impact on efficiency in both manufacturing process and in product design.
4. Manufacturing products in overseas markets where patent protections are weaker is just asking to have your products knocked off by competitors for less money. This is increasingly important where old appliances gain competitive advantage through new technologies in those products.
5. Consumers in the US are demanding more "Made in the USA" products.
6. Manufacturing job turnover is quite high in many developing markets.
7. Oil prices are triple what they were in 2000, meaning that freight prices have gone up considerably, making manufacturing closer to market more practical.
8. We've had a recent natural gas boom in the US, making the cost of providing energy to manufacturing facilities lower.
9. Because productivity per person has increased so much, wages are becoming a lower and lower portion of total costs.
10. Labor relations with Unions have changed quite a lot in many industries in the US, in large part due to the perceived flight of manufacturing from the US to other countries over the last decade. Unions are more willing to give a little.
11. Time to market. GE's Chinese made water heaters took 5 weeks to get from the manufacturing facility to the GE warehouse. The new US made water heaters (which cost 25% less in materials and can be made in a quarter of the time) take 30 minutes to get from the factory floor to the warehouse.

US Manufacturing will never get back the sheet numbers of jobs that it had in the 70s because we're far more efficient now than we were then. We need fewer people to do the same jobs. The economic output of our manufacturing sector is nearly the highest it has ever been, and we're still one of the world's biggest manufacturers, but not in terms of manufacturing employment, and we won't be. But we will have at least more of those jobs coming back to the US, which means we'll also have more jobs supporting manufacturing. This is good news for everyone.

http://www.theatlantic.com/magazine/...boom/309166/2/

[Rukentuts]

Another problem overseas is the high rate of turnover in tech industries. We are moving positions back to the USA because overseas employees only stay for like a year.

[Skizo]

This seems like a very positive trend for the U.S., but I worry it might cause significant instability within China if a lot of jobs dry up.

[Reeve]

Another problem overseas is the high rate of turnover in tech industries. We are moving positions back to the USA because overseas employees only stay for like a year.

I'll add that, as well as a few other things I've found.

---------- Post added 2012-12-12 at 04:32 PM ----------

I guess I should have put the word "America" somewhere in the title so people might read it.

[Roose]

I agree with most of that. Need to read that article.

As soon as a few industry leaders show that having your supply chain within the same region is the best practice we will start seeing the other companies come around. Lean manufacturing and JIT systems rely on a close network of suppliers, distributors, and retailers.

We also really need better, more informed consumers. They are the ones that ultimately dictate what companies do. Sadly, that is one of the reasons we are in this situation, because people like to remain blissfully ignorant.

---------- Post added 2012-12-12 at 11:49 AM ----------

Great article. Many need to read it, so that means that very few will.

One huge change has been shortened product life cycles. Products used to be designed to stay on market for 7 years. It is now around 2-3.

The main point in that I took home was that all of this outsourcing was done in the first place with very little understanding of the actual value created. They ignored almost all aspects of supply chain management. They looked at one thing, low costs of production. They ignored the logistics. My guess is because that was too much like nerd work for all of the big wigs.

They also ignored the importance of communication and transparency. They thought they could just hand over a design and cash in on a finished product. Dummies.

Now look what happened. These companies are going to have to come out of pocket to bring operations back home.

If the economy booms again it will be from this return home of American production. It will not be anything that banking or our politicians do. In fact, it will be despite them.

[Bolson13]

Good news for the US. China is simply starting to become too expensive and there is no middle class so their own market is too small for luxury items. Along with the housing bubble, China is bound to crash sooner or later. Grown too fast.

I was more expecting it to shift to places like indonesia and vietnam then back to the US though. But it is also good for places liie greece. If an American worker can be competitive in its own market then an even cheaper Greek should as well in the european market. As of late it seems that it would be wise for Europe to stop the austerity measures and start investing. The fat has been been trimmed at most companies, the stock market doesnt respond to bad news a lot anymore and now the competitive position seems to be okay. Time to kickstart it (finally)

[Jackmoves]

Good read, I really hope that trends keep up, it will be an incredible boost to the US economy, and that will help us out on this side of the pond as well, and we need it. Consumption in the US seems to be on the up to, at least when it comes to Swedish products, most big companies have reported increased sales in the US and a drop in the European market.

I think austerity in Europe needs to end as well, we've had quite a strong budget proposal for 2013(I'm not sure about our corporate taxes getting slashed as much as they are going to be though) here in Sweden and I think more countries need to invest.

[Kraenen]

But won't they just move back to china again when their middle class starts to grow and the standard of living and wealth increases? There's over a billion potential customers over there (+India)

[Kujako]

But won't they just move back to china again when their middle class starts to grow and the standard of living and wealth increases? There's over a billion potential customers over there (+India)

Depends on how trade laws are changed (or if). Right now, China charges high import tarifs on finished goods while we do not. So if you want to sell in China, you have to build in China.

[Reeve]

But won't they just move back to china again when their middle class starts to grow and the standard of living and wealth increases? There's over a billion potential customers over there (+India)

They may end up having facilities in both places, but I think their main high tech products will be mostly developed and manufactured here in the US, in part because of our stronger patent laws.

[Bolson13]

and all the other advantages you posted in your thread besides increase in pay.

Also, you are right. Clothing etc. will probably still be made in low wage countries because it is simply still too big of a cost gap per product.

[SirRobin]

Meh... Its all about costs. As long as, shipping back included, its cheaper to outsource? They will outsource. Personally I see outsourcing becoming pointless in an increasingly borderless world. The digital economy and increasing energy costs will make outsourcing less viable but will make insourcing not required either. Remember the "cloud?" That is where our economy is headed. Macro economics layered over micro infrastructure.

[Kivimetsan]

Actually the majority in this thread are wrong.
The reason manufacturing is coming back is because America is in a decline, whilst current manufacturers are converting to service based economies. See, America once bought all its crap from China, now China is going to set up shop in America and start building its junk in America.
The reason for this is: Your politicians killed your country and its value through perpetual warring and devaluation of the dollar (printing money through the fed).
The dollar is going to be worthless VERY soon, that's great for China because they can buy all of Americas junk for cheap, just like the world has been doing to China for the last several decades. Its just an endless cycle and its happened for thousands of years. No Empire reigns forever, not even Rome lasted, nor will America.

[Beavis]

Actually the majority in this thread are wrong.
The reason manufacturing is coming back is because America is in a decline, whilst current manufacturers are converting to service based economies. See, America once bought all its crap from China, now China is going to set up shop in America and start building its junk in America.
The reason for this is: Your politicians killed your country and its value through perpetual warring and devaluation of the dollar (printing money through the fed).
The dollar is going to be worthless VERY soon, that's great for China because they can buy all of Americas junk for cheap, just like the world has been doing to China for the last several decades. Its just an endless cycle and its happened for thousands of years. No Empire reigns forever, not even Rome lasted, nor will America.

Care to post some mainstream economic literature that backs up your claims?

Right now, the global labor arbitrage means that jobs should be moving from China to Vietnam or the Philippines, which they are to a degree. But, it certainly doesn't explain why manufacturing is coming back to the US. American factory workers on average still get paid 17 times what their Chinese counter parts do. Even accounting for the massive difference in American productivity, Chinese workers are still offer a significant labor advantage. So, why is it happening? Because as labor arbitrage isn't the only story.

[SirRobin]

Actually the majority in this thread are wrong.
The reason manufacturing is coming back is because America is in a decline, whilst current manufacturers are converting to service based economies. See, America once bought all its crap from China, now China is going to set up shop in America and start building its junk in America.
The reason for this is: Your politicians killed your country and its value through perpetual warring and devaluation of the dollar (printing money through the fed).
The dollar is going to be worthless VERY soon, that's great for China because they can buy all of Americas junk for cheap, just like the world has been doing to China for the last several decades. Its just an endless cycle and its happened for thousands of years. No Empire reigns forever, not even Rome lasted, nor will America.

I was once convinced that this was the way things would go myself. However my opinion changed once energy costs started, and kept, rising. There will come a point where it offsets cheaper labor costs and it actually becomes cheaper to build local. While our improving digital infrastructure will make "where" you live, employment wise, matter less and less. 3D printing will make micro local infrastructure and industries more viable. Unless there is a dramatic change in how the internet is managed of course.

So I think it will become less a matter of "circle of labor costs" and more a matter of an increasingly digital economy.

Of course we're all still screwed, we'll just be screwed a slightly different way.

---------- Post added 2012-12-12 at 03:12 PM ----------

Actually, what concerns me more than insourcing or outsourcing are the unemployables. One could ponder that we have already passed the point where we simply no longer have enough wealth, in circulation, to support employment for every able body and mind. As we can do more and more with less and less, the unemployable percentage will only grow. Becoming a larger and larger drain on the infrastructure.

[Reeve]

I was once convinced that this was the way things would go myself. However my opinion changed once energy costs started, and kept, rising. There will come a point where it offsets cheaper labor costs and it actually becomes cheaper to build local. While our improving digital infrastructure will make "where" you live, employment wise, matter less and less. 3D printing will make micro local infrastructure and industries more viable. Unless there is a dramatic change in how the internet is managed of course.

So I think it will become less a matter of "circle of labor costs" and more a matter of an increasingly digital economy.

Of course we're all still screwed, we'll just be screwed a slightly different way.

---------- Post added 2012-12-12 at 03:12 PM ----------

Actually, what concerns me more than insourcing or outsourcing are the unemployables. One could ponder that we have already passed the point where we simply no longer have enough wealth, in circulation, to support employment for every able body and mind. As we can do more and more with less and less, the unemployable percentage will only grow. Becoming a larger and larger drain on the infrastructure.

Yeah, as we get higher and higher productivity per person with better processes, greater automation, robotic labor, etc. I am a bit concerned that there simply won't be enough labor to support the populations we have in the world. It'll be the uncomfortable spot where human labor is still too important to stop normal economics entirely, but it's not so important that we have anywhere near full employement.

I still think we've got a few decades before that problem becomes big though. In the meantime, I'm happy to see more manufacturing jobs come back here. It should help our balance of trade a bit too, which is good.

[Beavis]

Socialism is really the only answer. Eventually mechanization will make human labor nearly worthless. Only the most innovate will have any ability to produce.

[Deleted]

The new apple factory is probably a robot city. So if you have no workers except a few engineers on the payroll you might as well save money on transport.
Robots get better and better at stuff the chinese laborers do now. Sooner or later everything goes back to the west.

[Aeluron Lightsong]

I always heard outsourcing was bad and from what I hear it's part of the reason why the U.S's economy in a crapper.

[Reeve]

I always heard outsourcing was bad and from what I hear it's part of the reason why the U.S's economy in a crapper.

Outsourcing isn't necessarily inherently bad, because if it reduces the price of products significantly, it makes everything more affordable, which means jobs in the US wouldn't have to pay as much in order for us to afford the same goods and services.

In this case, outsourcing has been bad for us, because when we look at the reality of the economics, it's often even cheaper to produce goods in the US, or where it isn't cheaper, the lower cost generally isn't enough to offset the loss of jobs here.