China Manufacturing: "We're Bringing It Back Home."
I know many of our posts of late have been fairly negative on China, and I really wish this one were not, but I really have no choice but to "call 'em like I see 'em" We are constantly writing articles on what country is going to be the "next China" and I have mostly been talking up Vietnam as that choice. See, for instance, the following posts:
- China Too Expensive? Who You Gonna Call? I Say Vietnam.
- Vietnam and China. Labor Shortages Or Not?
- China's New Labor Law And Why Vietnam Is No Big Thing
- On The Demise Of China Manufacturing....Kidding. Part II
- Vietnam Is The Next China. Only If You Completely Ignore Logistics.
- Vietnam Is The Next China, Part II. Only If You Completely Ignore Political Stability.
I had a revelation today. The United States is the Next China. How could I have missed it?
There are many articles out today on how manufacturing jumped unexpectedly in both the United States (and in England) and most attribute that to a rising economy. I agree, but I also think/know that at least some of that is due to American companies choosing to expand their manufacturing in the United States (as opposed to China) or simply shutting down their operations in China.
Here is what we have been working on JUST THIS YEAR:
- We are working on shutting down a large American service company that has been in China for more than five years. The reason for closing is that "we never felt our Chinese employees were on board with our organization" and we would rather run everything from outside China.
- We are working on extricating an American company from a manufacturing Joint Venture in China. The reasons are two-fold. One, the Chinese joint venture partner never cooperated and he always treated the joint venture like an extension of his own fiefdom. On top of this, the cost savings just were not as great as expected, when productivity and quality problems were taken into account.
- A manufacturing company that is shutting down all operations and "bringing it all back home." Again, the cost savings were never as high as expected and the U.S. facilities are just "so much better and easier."
I am not saying that every company is going to be closing down their China operations and going home, because that is certainly not going to be the case. Indeed, on the flip side, we are getting a ton of work from companies seeking to tap China's consumer and B2B market. We also are getting a steady flow of companies seeking to make low to mid range goods in China. Where I see the "return home" phenomenon most likely to occur is in difficult to manufacture goods where the U.S. company has existing U.S. operations so closing down China will not involve building a new factory anywhere else, but simply hiring back already-trained, already-skilled workers.
This is a new thing and so I am dying to know what you are seeing out there? Is this the end of cheap China?
Comments (15)
Read through and enter the discussion by using the form at the endmark - February 1, 2011 10:21 AM
Wow. This is big but is it sustainable? Hasn't the USA already gotten used to the cheap prices from China? Is it just a gimmick from American companies who want to promote the "Made in USA" brand value?
The other question is whether those skilled workers in the USA are willing to place their trust in working for an American company again? (assuming they are out of work because their factory/workshop/lab was shut down due to offshoring)
Whit - February 1, 2011 11:57 AM
Dan,
Great post!
In my experience, this is a growing trend, especially as the cost of transport increases with the cost of oil. The Canadian oil sands are actually helping keep the cost of gas and diesel below where it would be in the USA otherwise.
Of course the US government is doing just about everything it can to get in the way and foul up the works, but with the new House, that hopefully will change.
One of my own companies in the USA, a Tier 1 automotive supplier, is preparing to pull all its injection molds from China and run them in-house. Because of the overall slow-down in the States, the volumes are such that it is more of a pain to ship them from China. The math says make them at home.
Despite the fact that I make the majority of my living helping people do business in China, I have long maintained that a well run factory in the USA can match or beat the "true" China price - that is, the price when all the costs like transport, interest/carrying costs, value of the inventory, air freight for rush orders, higher defects, etc. are included. I am a minority owner of two manufacturing companies in the USA and I used to run one of them, and neither ever outsourced more than 10% of the business. We had all the tooling and equipment and knew how to run an efficient shop. China only got business that required new tooling or components outside of our capabilities (like die casting).
It will be interesting to see how this develops in the coming year.
Glen - February 1, 2011 11:57 AM
"Hasn't the USA already gotten used to the cheap prices from China?"
Yes, but we finally realized that we had to trade jobs for those prices. No jobs=no money to spend. I think some businesses are beginning to see that slightly higher production costs in the US are worth it if consumers actually have jobs, and thus, money to spend. Not to mention IP or QC issues incurred abroad.
Joe - February 1, 2011 5:48 PM
Well, perhaps Americans will be able to afford the slightly higher prices of having their goods produced in the U.S. once they get more jobs back. Also, the reduced price of transport and customs may take some of that pricey edge off.
Twofish - February 1, 2011 6:19 PM
See this also. I know a lot of people in Guangdong that are closing up shop and moving elsewhere.
Also, the Chinese government is actively trying to close up manufacturing. The Chinese economy has outgrown basic manufacturing and is moving into another areas. The big reason is money. You can no longer get cheap Chinese workers, because Chinese workers are demanding more money.
Glen: I think some businesses are beginning to see that slightly higher production costs in the US are worth it if consumers actually have jobs,
That's not what is happening. What is happening is that the wages in China have risen to the point that manufacturers just can't make the huge profits that they did a few years ago.
David Li - February 1, 2011 9:58 PM
I wonder how this trend's long term implication on the robotics industries in the US. US always has the leading robotic researches and business has been booming in the past few years bringing in robots to war. Now, the wars are cooling down but the business has to keep growing. How this movement will lead to more automation tools to be introduced into US factories.
Also, once these tools are tested in the US factories, how fast will they be introduced back to China?
NeXT (Jobs' company that "acquired" Apple) used to have a state of the art fully automated factory in the US before it was sold to NEC in the late 90s. I had a conversation with a few researchers in the business schools about what would had happened if US had invested in manufacture automation instead of quick MBA thinking of offshoring popular in the 90s.
Maybe we have a chance to see what would happen with this wave.
Etienne - February 2, 2011 12:25 AM
I agree with this. For some types of products or when companies indeed have factories at both sides, China is no longer a no brainer decision. Moving back to US actually can be a way to differentiate from Chinese companies that start to work directly with channels to access the US market.
At the same time, China is aiming at more added value products and services.
For an humorous take on this move back to the US, see the Daily Show's clip: "Wham-O moves back to America".
http://www.thedailyshow.com/watch/thu-april-22-2010/wham-o-moves-to-america
Enjoy.
A.Retentive - February 2, 2011 4:02 AM
This only applies to small US companies that only have the US as their primary market. It won't apply to multinationals who still need China both as a manufacturing base and as a regional market in its own right. .
Aaron - February 2, 2011 6:09 AM
I don't know if this trend is going to keep going. Some manufacturing slow down overall will probably bring the work back to US, as China's advantage in scale of production disappears.
But the same report that said US manufacturing increased, also said US did it by higher efficiency. Translation: US did it with fewer workers. More Translation: US corporations are increasing profits, but pushing workers harder. (Other reports say more and more US workers are part timers doing multiple jobs).
That doesn't mean that the large US companies are actually going to hire more and more workers. It simply means the same old trend of US companies increasing profit margin whereever they can squeeze it, either by cheap labors in Asia or pushing US workers harder.
Albert Z. - February 2, 2011 7:34 AM
I wish I could share your enthusiasm, but i think all you are writing about is those U.S. companies who should never have gone into China in the first place.
Glen - February 2, 2011 10:38 AM
@twofish
"That's not what is happening. What is happening is that the wages in China have risen to the point that manufacturers just can't make the huge profits that they did a few years ago. "
Why not both? Chinese wages are increasing as US purchasing power wanes.
Michael Zakkour - February 2, 2011 1:24 PM
Hi Dan and all,
I am seeing this as well. Major reasons include:
1. The rise of the cost of manufacturing in China. The labor laws, plus higher raw material prices, plus general increases in the cost of doing business in China.
2. The cost of shipping. A concerted effort by the shipping industry to remove ships from service combined with higher fuel costs means the cost of shipping goods 8,000 miles has gone up significantly.
3. US companies (and for that matter some Chinese companies) want to produce in the US to be closer to market for a number of financial, political and logistical reasons.
4. A number of US companies (though not a majority by any stretch) are experiencing some China fatigue when it comes QC, costs, JV problems, increasing importance of SOEs in China etc.
5. The increasingly better play (and where we are experiencing booming growth) is selling into the B2B and consumer markets in China.
6. The reality of losing IP and technology is outweighing the benefits in some eyes.
All that said this is a trend in its infancy. Most likely low margin commodity manufacturing WILL go to Vietnam, Indonesia, et. al and some mid-high end production will come home and some will stay in China.
The rest remains to be seen.
Its too early to tell but change does seem to be in the offing.
Twofish - February 2, 2011 8:11 PM
Glen: Why not both? Chinese wages are increasing as US purchasing power wanes.
Because it's a different game. The way that OEM's in Guangdong have worked is that they've been producing products on orders from overseas companies, which then go into the overseas distribution chain, which means that they are manufacturing only and they don't have any expertise on sales, marketing, and distribution.
In order to start selling things locally, the OEM's are going to have to create sales, marketing, and distribution chains within China. This is something that they don't know how to do. Some of them will learn, but I think that most of them will just cash out. Also as the cost of labor increases, the manufacturing processes change. With low cost labor you can just put a ton of people on an assembly line. With high cost labor, you have to invest in automation, and this implies capital expenditures, which implies a very different structure than OEM's are used to.
The good news is that capitalism is all about change and creative destruction, and there seems to be a very strong effort by the government to make the changes as smooth as possible.
Cat402 - March 9, 2011 1:57 AM
Great article. I hope you are right... being in the US; I hope they are bringing it back home because the American people are in dire straits and without much confidence in our own government to find a way to bring back manufacturing to the USA!
CT - May 18, 2011 2:27 PM
I only see a small trickle coming back. To me, the biggest risk in China is IP, many manufacturing "partners" want to steal your product and sell directly to your customers.
But for simpler products without high transportation costs, China makes more sense as there aren't a lot of alternatives. We've found that many US factories don't want to bother unless it is high priced medical or military and the prices are much higher. For a recent project, the cost was $45 in the US & $15 in China, for example. Would like to see some of our factories here get a little hungrier, you would think that would happen in a down economy but didn't see it.
Mexico is missing out on a huge opportunity here. If they could control the drug gangs, they could get a flood of manufacturing business as the China price is rising and they'd still be quite a bit below the US price.