Rethinking Foreign Costs Spurs Manufacturing in U.S.

Manufacturing is making a comeback in North America, a trend that industry experts say is being driven by a re-examination of the cost of producing and shipping goods from Asia to customers in the United States and Europe — and new supply-chain realities.

Those realities include increased transportation costs caused by higher fuel prices, rising wages for factory workers in China, and risk associated with currency fluctuations and disruptions in global supply chains.

“It is a very real phenomenon,” said Greg Smith, industry director for transportation and logistics at Oracle Corp. “Manufacturing in China will not go away. It will continue. But product life cycles are shorter. Firms need to be more responsive and having 50- to 60-day-long supply chains can expose critical faults” in the way manufactured goods are produced and delivered.

“We tend to think of [manufacturing] moving out [of North America] because of lower labor costs. In fact, it has been supported by cheap transportation. That’s changing,” Smith said. “The trend now is to build where you sell and sell where you build.”

Smith calls the shift toward more local and regional manufacturing a “megatrend” that will affect supply-chain strategies for decades to come.

A report issued by Boston Consulting Group last year concluded that by about 2015, manufacturing in some parts of the United States will be just as economical as manufacturing in China because of a shrinking wage differential and savings in transportation and inventory.

“When all costs are taken into account, certain U.S. states, such as South Carolina, Alabama and Tennessee, will turn out to be among the least expensive production sites in the industrialized world,” the report said. “As a result, we expect companies to begin building more capacity in the U.S. to supply North America.”

Some early evidence of such a trend does exist:

• NCR moved production of automated teller machines to a plant in Columbus, Ga.

• Coleman Co. is moving production of coolers from China to Wichita, Kan.

• Sleek Audio moved production of high-end headphones from Chinese suppliers to a plant in Florida.

• Peerless Industries will consolidate manufacturing of audiovisual mounting systems in Illinois from China.

In January, Nissan Motor Co. announced plans to invest $2 billion in a new manufacturing complex in Mexico, which, along with two other existing plants, will supply parts for Nissan’s car assembly operations in the United States.

Stihl Inc., a German-owned manufacturer of chain saws and outdoor power equipment, is expanding its 90-acre, million-square-foot factory and distribution complex in Virginia Beach, Va. The company started assembling products there in 1974 and now manufactures a majority of Stihl’s products and exports to more than 90 countries, including Russia and Australia.

Stihl, which also has factories in Austria, Brazil, China, Germany and Switzerland, is constructing a 53,000-square-foot factory addition and has purchased a 62-acre property adjacent to its Virginia Beach campus to accommodate future needs.

“The economy is showing signs of recovery, with manufacturing and small business taking the lead,” said Peter Mueller, executive vice president of operations for Stihl, announcing the expansion plans.

In an interview with Transport Topics, Mueller said the key to reviving manufacturing in North America is automation.

“We have a large number of robots,” he said. “When you compare our factory to the typical factory in the U.S., we have four times as many [robots]. We have two times as many as [in] Germany.”

Mueller said the use of technology to boost production makes U.S. factories more competitive with overseas plants and creates a need for workers with higher skill levels.

In Lincolnton, N.C., Bruce Cochrane, a fifth-generation furniture maker who spent the past 15 years working as a consultant for U.S. furniture makers in China and Vietnam, came back to restart a factory that will make solid wood bedroom and dining room furniture.

At an American Home Furnishings Alliance-sponsored Manufacturing Summit at Mississippi State University in March, Cochrane told industry associates that the time was right to bring furniture manufacturing jobs back to the United States because of rising wages for factory workers in China and increased transportation costs. At the same time, he said, there is an increase in Chinese demand for Western products.

Wyatt Bassett, an executive with Vaughan-Bassett Furniture Co., also described plans to spend $8 million to expand operations in factories in Galax, Va., and Elkin, N.C.

“It’s encouraging to see,” said David Purvis, executive director of the Specialized Furniture Carriers division of AHFA in High Point, N.C. “It may be premature to say two data points make a trend, but it looks like a positive move.”

Over the past decade or so, hundreds of thousands of textile and furniture-making jobs in the United States were lost as one manufacturer after another shifted production to China and other low-wage countries.

Some of the growth in manufacturing, however, is not a result of production coming from overseas but rather its moving from higher-cost regions of North America to lower-cost regions.

For example, Progress Rail Services Corp., a subsidiary of Caterpillar Inc., moved its locomotive assembly operations from southern Ontario to a new plant in Muncie, Ind. The company also added capacity at factories in Brazil and Mexico.

In February, Caterpillar announced plans to move production of small track-type tractors and mini hydraulic excavators from Japan to a new plant that will be built in Athens, Ga.

“The decision to shift production from Japan to the United States is driven by the proximity to a large base of customers in North America and Europe,” said Mary Bell, vice president of Caterpillar’s Building Construction Products division, based in Cary, N.C. “Our objective is to better serve those customers from this new factory.”

Company officials said the new plant will add more than 1,400 jobs at the facility and 2,800 jobs with suppliers and other companies that will support the operations.

They also said the site was selected for its proximity to: the ports of Savannah, Ga., and Charleston, S.C.; a regional base of potential suppliers; a positive and pro-active business climate; and a good pool of potential employees with manufacturing experience.

Caterpillar’s moves are part of a broader expansion of manufacturing capacity that includes new factories in China, India, Indonesia and Thailand, as well as in North America.

In the United States, Caterpillar has pledged $300 million to increase capacity for large mining trucks in Decatur, Ill., and $340 million for production of large track-type tractors in East Peoria, Ill.

Caterpillar said it also is expanding a plant in Sumter, S.C., to produce hydraulic cylinders for its construction and mining equipment sold in North and South America, and a new axle assembly plant is slated to open in Winston-Salem, N.C., in November.

Another iconic American business — General Electric Co. — is making moves to expand manufacturing of appliances and aircraft engines in the United States.

On March 20, GE Chairman Jeff Immelt and Kentucky Gov. Steven Beshear opened a new refrigerator production line at GE’s Appliance Park in Louisville. A month earlier, GE started production of energy-efficient water heaters in what officials termed the first new factory at Appliance Park since 1957.

GE said the renewal of manufacturing in Louisville is a result of several factors, including the adoption of lean manufacturing techniques and lower starting wages for workers.

Automakers also have negotiated labor agreements that allow them to pay lower rates to new workers and the bankruptcy of General Motors and Chrysler allowed those companies to jettison a significant share of pension liabilities for retired workers.

Tom Jones, senior vice president and general manger of U.S. Supply Chain Solutions for Ryder System Inc., said he expects more foreign carmakers to open manufacturing plants in the United States because a decline in the value of the U.S. dollar is making imports more expensive.

“More manufacturing is coming to the U.S. because of the strength of the Japanese yen, making it too expensive to export vehicles from Japan,” Jones said.

Some automakers also had production disrupted by a shortage of parts after the 2011 earthquake and tsunami in Japan.

Jones said that domestic auto production, which bottomed out at between 8 million and 9 million units, could hit 14 million units this year.

“The auto industry is booming now,” he said. “There’s a lot of activity.”

As manufacturing ramps up, some observers are concerned about having enough capacity to handle the additional freight volume.

“We feel fortunate,” said Don Chase, director of planning and logistics at Stihl. “We haven’t realized a capacity shortage — but if manufacturing goes up, capacity will be constrained.”

Chase said the company ships its products to six independent and six company-owned marketing and sales distribution centers, and about half of its outbound truckload shipments are handled by C.H. Robinson Worldwide — the nation’s largest freight brokerage firm as reported in the Transport Topics Top 50 list of the largest logistics companies in the United States, Canada and Mexico.

For inbound freight from vendors, Stihl uses ALC Logistics, a unit of Allen Lund Co., to handle less-than-truckload shipments and to negotiate pricing and coverage with a group of core carriers.

Chase said the company expects to use trucks as the primary mode of transportation “for a long time,” although he also sees some increase in the use of rail intermodal service to move products to distribution centers in the western United States. Intermodal currently accounts for about 20% of freight volume, he said.

Bob Costello, American Trucking Associations’ chief economist, said that as long as overall economic growth remains subdued, the market should be able to supply adequate freight-hauling capacity.

“If the economy grows by 3% versus 2%, I’m not sure we will have enough capacity,” he said.

Among specialized furniture carriers, capacity appears adequate, despite the closing of Furniture Transport Group, one of the nation’s largest furniture haulers, in October.

AHFA’s Purvis said several former executives from the failed firm since then have started up their own trucking companies.

Furniture makers and haulers also must grapple with new methods of shipping, as growing public acceptance of online purchases of furniture is changing the way products are delivered.

Instead of delivering from the factory to a retail store, Purvis said, furniture is stored in a warehouse and delivered directly to homes and businesses by specialized delivery companies.