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Made in America?

It seems clear that three decades after offshoring emerged as the best way for Corporate America to lower its break even cost of doing business, we are now seeing a reverse migration.
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I've been hearing the phrase "Made in America" quite a bit recently, welcoming the repatriation of jobs back to the US from China, India and the rest of the off-shore parabola. Most reports have focused on the price of oil being the primary driver, but the return of outsourced jobs is far more sweeping in its implications.

Make no mistake, outsourcing will continue: One report estimates that the global outsourcing industry will rise to just under $500 billion by 2016.

However, it seems clear that three decades after offshoring emerged as the best way for Corporate America to lower its breakeven cost of doing business, we are now seeing a reverse migration, primarily because the fallacies of low-cost labor markets have been exposed. It's a function not only of rising production costs, but a flight from unregulated overseas markets where companies have found that they cannot assert their rights to quality control and intellectual property. (Let's consider this the next time we hear the canard that "All regulation is bad because it puts business in a stranglehold." Ironically, regulation can be a magnet for business).

To deal briefly with cost, it is irrefutable that companies have circumnavigated their operations back to the US because overseas workers are becoming more expensive: According to a recent report by Boston Consulting Group, in 2000, hourly Chinese manufacturing wages were just 52 cents compared to $16.61 in the U.S. By 2015, the wage difference should be $4.41 vs. $26.06 -- hardly parity, but no longer a slam-dunk case when you consider that US workers are three times more productive. The income growth rate is expected to continue to build in China while BCG predicts the US will grow at a much slower pace.

Oil prices compounded this spike in the cost of outsourcing: During the last run up in oil prices prior to the financial crisis in 2008, investment bank CIBC calculated that a $1 rise in world oil prices translated to a 1% rise in transport costs.With oil around $120 a barrel, the cost of shipping a 40-foot container from Shanghai to the U.S. Eastern seaboard jumped to $8,000 from $3,000 in 2000. "At $20 a barrel for oil, transport costs were equivalent to U.S. tariffs of just 3%," CIBC wrote. But today's $150 barrel oil realities imply tariffs of 11%, harkening back to the average tariffs of the 1970s. In the last four years, shipping costs have risen 71% because of higher oil prices, as well as cutbacks in ships and containers, according to IHS Global Insight.

While the discussion of energy costs has focused on the economics of transportation, more interesting are the infrastructure weaknesses that the staggering growth rates in countries like China have exposed. According to Trevor Houser from economic research firm, The Rhodium Group, electricity costs have skyrocketed: 6.1 cents per kilowatt hour in 2001 (when they first joined the World Trade Organization) to 11.6 cents per kWh and climbing. In contrast, the U.S. has only risen from 4.73 to 6.7 in that same time period.Rolling blackouts (a news-worthy rarity in America) are common overseas. You simply can't maintain full speed when you're operating with an antiquated engine.

Then there's that large unwieldy relay, the Global Supply Chain, shuttling the latest cool product from factory to fan base. Accenture recently found in their study of 287 businesses that "Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations [has] hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly meet increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs."

Simply put, if you're a TV manufacturer and Best Buy calls to request more beveled-edge titanium flat screens for next month, you can't fill the order because the factory in Shenzhen wouldn't be able to build and ship them fast enough to beat your locally-based competitor. Practically half the participants in the same survey reported crippling issues with production cycle delays, while 46 percent face quality control fallout from overseas manufacturing and supply.

Additionally, global supply chains have been bedeviled by the shift in weather patterns and the spate of natural disasters. The March earthquake and tsunami in Japan, aside from the human tragedy, disrupted global supply chains, leaving many companies stranded without critical components, including Boeing, Caterpillar, and General Motors.

Quality also presents a significant issue, more difficult to address when your delivery chain resembles the hub and spokes of a bicycle: If a problem is discovered in parts reaching customers in the United States, the fault could occur anywhere on the supply chain stretching all the way across continents. That makes the true cost of manufacturing offshore in places such as China much more than the quoted price of the parts on the RFQ.

One of the rudest awakenings for American companies about the realities of outsourcing has been around the issue of intellectual property and piracy. Having grown up in a part of the world where every video was a third-generation knock-off encased in a photocopied sleeve, I've always been stunned at the ingenuity, rapacity and speed of the black market. It's difficult, if not impossible, to enforce patents, copyrights, and other laws in many parts of the world.

Take Farouk Systems Inc of Houston, Texas. A manufacturer of high-demand luxury hair care implements, company founder Farouk Shami contracted with a Chinese molding company, only to find that his designs were being pilfered and his CHI products counterfeited. Shami fought for several years to no avail. His struggle with the Asian Black Market reads like Hercules battling a modern-day Hydra. As soon as one was shuttered, another operation would spring forth, " sometimes right next door to the first one".

This painful lesson in international production cost him half a million dollars per month in customer service, replacing badly made irons and dryers bearing his brand name. Eyes opened, he has returned his production stateside, employing custom injection molders in his home state, leveraging high-volume, long-term contracts to receive impeccable U.S. quality, for about the same pricing that initially lured him to China.

"You don't have laws in China that will protect you against IP theft," adds Rick Admani Abulhaj, COO of Diagnostic Devices Inc. of Charlotte, North Carolina. "We have a lot of investment in our IP, and we have more control over it in the U.S." As a producer of blood -glucose machines, on which thousands of lives depend, he also believes strongly in the quality control advantage of U.S. production. "We have to adhere to FDA regulations," he says. "When you make products in the U.S., you make them to a higher standard; particularly in healthcare, the FDA is the law. If you don't comply, you get your products recalled. In China there are no ramifications."

So, the mishegoss that is the overseas market means that all those sorely needed production jobs are coming back home for Christmas, right? Not entirely.

Consider how all this started in the first place: The landscape of the American economy was forever altered in 1948 under the aegis of the Marshall Plan. Prior to that, America was a self-supporting system: We made what we used. But in order to help restore war-ravaged Europe and Asia, manufacturing was shifted abroad. By the Reagan era, manufacturing employed only 25 percent of U.S. labor force. We have since fallen to a mere 12 percent.

Something has definitely changed in the paradigm since the 1940's, namely this: the key to domestic manufacturing isn't so much labor as automation. The numbers tell the story emphatically: While manufacturing as a percentage of the labor force has nearly halved since 1980, the value of goods and services produced has remained static. Here' the kicker: Based on first-quarter GDP, we produced slightly more goods and services locally than before the recession -- but utilizing 7.3 million fewer workers. Factory output is 55 percent higher than a decade ago, while factory employment is 32 percent lower. The jobs that remain typically require sophisticated skills and higher education than the average laborer of the past. (Translation: Companies can produce more with fewer workers using new machinery operated by college-accredited workers.)

American factories have recouped nearly all of their losses since the crisis, and are now back at nearly full productivity -- employing a skeleton crew. Corporations are sitting on about $1.8 trillion in cash, buoyed by record profits and stock prices which have doubled from their recession lows. It is evident that there is no longer a strict correlation between hiring and corporate revenues.

The future is shaping up to look like this: labor-intensive low-cost things will continue to be made overseas. America, on the other hand, will continue to excel at making big, complex, expensive items.

In the late 1990s, America's manufacturing stagnated at the $4 trillion mark. But then we found our niche -- in tractors, steel, plastics, knives and medicines. According to the U.S. Census Bureau, manufacturing hit a record $5 trillion in 2006 -- and heavy machinery was where it was at. Today, mining, farm and construction equipment are up 20 percent since 2002. Revenue from coal products and refinery activity nearly doubled during that self-same period.

The business of refining and processing raw materials (iron, steel, aluminum and copper) has increased 40 percent. Chemical manufacturing, notably pharmaceuticals, grew 22 percent. We also do well in plastics, software and telecommunications. The Specialty Blades factory in Staunton, VA makes blades that impact all aspects of our lives, from scalpels in the emergency room to the little gadgets that tear off our grocery receipts. The company's rank and file aren't unskilled factory workers but engineers, working with surgeons to create a plethora of sophisticated tools, including a circular cutting and stapling device which reduces the invasiveness of digestive-tract surgery. "U.S. engineering is flat-out way more developed than in China for this function," says the company's CEO, Peter Harris.

In July 2008, Deloitte published Made in North America, taking a C-level look at U.S. production. When the 321 executive participants were asked where they intended to expand production, 37 percent said Mexico, while another 37 percent indicated China would grow as their hub of operations. Similarly, India and Canada drew equal favor with 24 percent apiece. How did the United States fare? 44 percent. While that's great news for production, it's not nearly as auspicious for employment, as these factories may be staffed by robotics rather than real people. Some have cited the need for the innovation economy to fill the void left by traditional manufacturing, particularly in the science, technology, engineering and math fields (STEM). However, when the Bureau of Labor Statistics qualified the 97 categories of STEM, it reflected only 6% of the ready US workforce.

In the end, what we need is a game-changer -- disruptive technology like the internet -- to drive the employment sector. We all know that Made in America is still a good thing. A great thing. It just doesn't mean what it used to.

Special thanks to contributions from co-author, Heather M. Carper. Heather is a Chicago-based Writer, Researcher, and Social Media strategist, who is currently outsourcing some of her finely honed American-made skillset to meet the needs of the primarily South Asian clients of the Indo-American Center.

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