Returning to America - The Debate

By Kevin Meyer

Mark over at the Lean Blog tipped me off to an interesting article at Deloitte that debated the pros and cons of manufacturers repatriating jobs back to the United States.  Probably the most interesting facet is that a major consultancy with a typically traditional mindset is actually debating the question as opposed to simply pushing the religion of outsourcing.  In fact, the "pro" side of repatriation touches on points we've discussed here several times while the "con" side spouts forth the usual narrow-minded myopic arguments.  Perhaps we deserve a prize for being ahead of those guys.  Again.

Manufacturing jobs: To repatriate or not to repatriate, that is the question.

The gap in structural costs between U.S. and offshore manufacturing operations has shrunk significantly in recent years – down to 17.6 percent in 2008 from nearly 32 percent in 2006. Some say this trend creates new strategic options for facility and supply chain planning. Others argue that two of the structural drivers – energy costs and taxes – will make it impossible for U.S. manufacturing to regain competitive advantage. Which raises the question: Is it time to start bringing manufacturing jobs back to the U.S.?

Well, actually they never should have left in the first place and in if you did follow the lemmings then the best time to "start" was a couple years ago.  

Most of the rest of the article is in a point / counterpoint format, so here are some highlights:

Pro	Con
It’s not all about cost. Quality and intellectual property are big risks in offshore manufacturing. So are supply chain disruptions. Customers won’t wait 30 days for their orders to arrive from abroad.	You can cover a lot of risk with a 17 percent cost advantage.
Costs of labor in other countries are on the rise. Besides, it’s not all about labor. Innovation, productivity and automation play a big role in reducing the overall impact of talent costs.	The U.S. cost of talent dwarfs that of thriving offshore markets. That’s a big piece of the puzzle ... and it’s not changing anytime soon.
The cost and supply of U.S. talent offer significant advantages right now. First movers will benefit from an eager labor pool – and the good will of American consumers.	Sure there are a ton of unemployed people, but top talent is still hard to come by in the U.S.. Other countries have just as much talent to offer, if not more. And at a better price.

The "con" side talks in terms of labor cost while the "pro" side understands that there is more to labor than simple cost.  There's creative talent, and now's the time to lock up some of the great talent available on the market.

The article also discussed the issue with three Deloitte staff members.  First, Dmitri Shiry:

One reason for the improvement is that other countries are experiencing increases in non-wage costs. Canada and the United Kingdom are seeing health care benefits go up as supplemental private insurance becomes more popular. Increasing tort claims are impacting other European countries, and China is being affected by rising pollution control requirements.

The U.S. tax rate is still among the highest overall corporate rate for industrialized countries. This is especially challenging because it has remained largely unchanged since 1986, while other countries have aggressively lowered their rates. High-tax environments may discourage capital investment.

Those comments are interesting from a variety of perspectives, especially since we've touched on how other countries seem to be moving away from government healthcare and high corporate taxes at the same time the U.S. is moving in that direction.  Go figure.

Here's Tom Morrison on the talent side of things:

The crisis is not about the availability of workers for jobs that require technical skills. It is about a mismatch of the availability of these skills where manufacturers want them most. This skills shortage is exacerbated by an aging workforce and the increasingly global nature of business.

Innovative approaches to training, development, and retention can help improve the availability of workers with the right skills and the incentive to stay. Relative to many countries around the world, the U.S. and many states do not offer the types of training programs and incentives that can be found in other countries to assist in developing the right skills, exacerbating the shortage. Companies should consider investments and partnerships with local technical schools, community colleges and universities as a means of building talent pools and pipelines.

Completely agree.  And Todd Izzo on tax policy:

Taxes can play an important role in encouraging companies to expand in the U.S. If the U.S. were to adopt tax policies that encouraged domestic investment in capital and labor, such actions could further reduce the structure gap in costs between U.S. firm and their foreign competitors.

Current policy debates in Washington are focused on raising taxes and reinforcing the current system rather than on new approaches to business taxation. This continuing debate over proposed patches to the current system means that businesses, both domestic and international, experience the U.S. tax code as inherently unstable and unreliable.

Congress has an opportunity in the next few years to strengthen U.S. manufacturing by convert the conversation about raising business taxes into a serious conversation about fundamentally reforming business tax rules to encourage investment in labor and capital.

Good luck with that.  After just "achieving" a record deficit I bet the ability to focus long term instead of the traditional flawed knee jerk traditional "increase taxes to increase revenue" mentality will be virtually impossible.

But the good news is that job repatriation is occurring and accelerating.  Perhaps as more and more companies recognize the value of shorter supply chains and in-house talent, real change will happen.

Comments

[Alton Schmidt]

When you use the phrase "labor shortage" or "skills shortage" you're speaking in a sentence fragment. What you actually mean to say is: "There is a labor shortage at the salary level I'm willing to pay." That statement is the correct phrase; the complete sentence and the intellectually honest statement.

Employers speak about shortages as though they represent some absolute, readily identifiable lack of desirable services. Price is rarely accorded its proper importance in their discussion.

If you start raising wages and improving working conditions, and continue doing so, you'll solve your shortage and will have people lining up around the block to work for you even if you need to have huge piles of steaming manure hand-scooped on a blazing summer afternoon.

Re: Shortage caused by employees retiring out of the workforce: With the majority of retirement accounts down about 50% or more, most people entering retirement age are working well into their sunset years. So, you won’t be getting a worker shortage anytime soon due to retirees exiting the workforce.

Okay, fine. Some specialized jobs require training and/or certification, again, the solution is higher wages and improved benefits. People will self-fund their re-education so that they can enter the industry in a work-ready state. The attractive wages, working conditions and career prospects of technology during the 1980’s and 1990’s was a prime example of people’s willingness to self-fund their own career re-education.

There is never enough of any good or service to satisfy all wants or desires. A buyer, or employer, must give up something to get something. They must pay the market price and forego whatever else he could have for the same price. The forces of supply and demand determine these prices -- and the price of a skilled workman is no exception. The buyer can take it or leave it. However, those who choose to leave it (because of lack of funds or personal preference) must not cry shortage. The good is available at the market price. All goods and services are scarce, but scarcity and shortages are by no means synonymous. Scarcity is a regrettable and unavoidable fact.

Shortages are purely a function of price. The only way in which a shortage has existed, or ever will exist, is in cases where the "going price" has been held below the market-clearing price.

[david foster]

"Shortages are purely a function of price"...the price may take a long time to influence the supply. If the price for registered nurses goes up, then the increased output of nurses depends on:

1)People realizing that this career has become more attractive
2)more 8th through 12th graders studying enough math and science that they will be able to succeed in nursing school
3)nursing schools adding enough capacity, which depends attracting scarce skills to the faculty as well as on physical facilities

Cultural factors matter too, as with the perception that nursing is mainly a career for women.

The same points apply in other fields; for example, entry to many skilled blue-collar trades is impacted by the perception that they are automatically lower-status than any form of office work.

[Peter Reynolds]

Dear Kevin,

I notice arguments in the Pro’s & Con’s debate is exclusively centred on costs, particularly labour. It ignores other factors including off-shoring’s impact on the environment (carbon emissions etc.), its vulnerability to fluctuations in the oil price and most importantly, the strategic imperative of retaining skills, capabilities and expertise stateside.

Moreover, even if “Other countries have just as much talent to offer, if not more. And at a better price”, neglecting talent stateside means it will not be nurtured, it will go dormant and will be left behind (use it or lose it). That’s not good for the country. Imagine the threat to national security if the US lost all of its metalworking, weapons-making capabilities and related manufacturing technologies.

In the long run, if this trend is extrapolated, the developing world will eventually accumulate all the skills the developed world has lost. If/when that happens and people one day wake up and ask where have all the skills gone, the answer will have to include “laziness”.

Outsourcing remains a follow-the-herd easy-way-out to competitive advantage. (Excuse the mixed metaphors!)

Another related issue…
Everywhere there is this bleating that manufacturers and other supply chain players have to contend with rising costs. WHY??? One basic question I’d like to ask: where do all these rising costs come from? And are they preventable? I understand, for example, rising energy costs (i.e. fossil fuels) in the sense that we have to dig deeper for coal, or pump oil from more inaccessible rock crevices – that makes sense. Rising material costs can be understood because these may be finite non-renewable resources (timber, minerals etc).

But how many of these “rising costs” are essentially man-made (excessive executive bonuses, fancy buildings, company perks, premium pricing by monopoly suppliers, customer call centres, wasteful marketing propaganda campaigns, unnecessary corporate sponsorships, spending non-wealth-growing services). If you change the system or organizational culture, you may be able to arrest many of these costs. Perhaps evolving excellence can look into what all these spurious rising costs are really about.

[Bill Waddell]

The big hole in such philosophical discussions is the mater of of value. The folks in government, academia and at outfits such as Deloitte know nothing about real manufacturing - haven't seen the inside of a factory for the most part - and to them a widget is a widget. They assume that the widget produced in China is absolutely identical to the widget produced in the USA because they are produced to the same specifications. In fact, they are not the same.

A product produced in a factory in the USA is, by and large, continuously improved with the design engineers, manufacturing engieers and prodction people in close continuous proximity to each ther. Small problems are solved quickly and small improvements in the product or the process are quickly evaluated and implemented.

On the other hand, when the product is outsourced to China or some other low cost country, the defect level goes up astronomically and the focus is to inspect, find and weed out those defective products. Any continuous improvement thoughts are cast to the wayside. The designers are half a planet away and the production people have neither the knowledge nor the empowerment to change anything. Rather than continually increase the value of the product, the struggle is to maintain the specified value by catching most of the failures.

The overwhelming majority of companies that move their manufacturing from the USA to China begin a race to the bottom, if that is not where they were when they started. Walk into any Walmart or Target store and you will see multiple choices for just about every product. The products for the most part fall into one of three catgories: Those made in China battling each other at the lowest price point; those made in China with some name brand on them struggling to retain the illusion of value through their marketing efforts (the ones I have blogged about such as the P&G products that are rapidly losing ground to the private labeled products as they try to command American prices for Chinese value); and those at slightly higher prices points made in the USA, Canada, Australia or Western Europe.

So long as the higher priced products are 'close enough' in price - within a reasonable range - and the manufacturer has an intense focus on value (quality, reliability and usability) the western made products do very, very well - i.e. Wahl Clipper, Buck Knives, etc... This is because the customer knows they get more value for their money than they do with the cheaper products.

The self-proclaimed experts have no concept of this, but it is very much the reality. People scratch their heads at Toyota because their products are not necessarily cheaper than those offered by Ford or GM. They think Toyota's success is some hangover from the days when they were. It is not all about price, however. It is price relative to value. Toyota products are not cheaper - the customer simply believes he gets more value for the price.

When an economist or a CEO with his head stuck in what he was taught at Harvard or what he learned at McKinsey evaluates manufacturing 'by the numbers' and the most important number is cost, they miss the most fundamental piece of the equation - value - what the customer gets for the money.

If this were not true, and cost/price were all that mattered, there would only be one brand, one model of everything on the shelf at Walmart - whatever was cheapest. But there are multiple selections for just about everything. Ask yourself why this is and ask yourself whether you always buy the cheapest version of everything and, if not, why not.

[Jason Morin]

Bill,

I buy very cheap, foreign-made, single-disc, DVD players for our 2nd TV. I value the low price (just bought one for $12 after rebate) and simplicity. I also recognize that my DVD player has a limited useful life (they last about 2-3 years). But the original cost and replacement cost still beats the higher-priced DVD players. Do I always buy cheap? Of course not. We seek out higher value for our vehicles. But I don't need nor want the best made products all the time.

[Jon Miller]

Someone will get a Nobel Price in economics one day for pointing out that repatriating jobs is cheaper overall because it increases employment, spurs spending, stimulates the economy, reduces tax burden, increases investment...

[Bill Waddell]

Jason.

I doubt that you had an American made alternative when it came to buying the DVD player. You are comparing the features of one Chinese manufactured product with the features of a completely different Chinese manufactured product. You are comparing Chevrolets with Cadillacs.

My point is that, if there were such a thing as an American made DVD player with the exact same features as the one you bought - even at a 20% price premium making your price $14.40 - and you perceived the value of that DVD player to be better (more likely to run without defect, likely to last longer, easier to get replaced if it failed, easier instruction manual to understand, etc...) I belive you would have paid $2.40 more.

For most people and most products, the price difference between $12 and $14.40 would not be significant enough to enter into the decision if they perceive a difference in the value of the product.

[Bill Waddell]

Jon,

The problem is that individual companies expatriate jobs, and they would have to be the ones to repatriate those jobs. The benefit from bringing the jobs back are to the broader society as a whole, and not necessarily to the individual company. Why should a company act against its own profit interests just because it is good for the country?

The dilemma this poses is why most countries have an industrial policy of one sort or another to assure that certain industries stay at home.

[Kevin Carson]

I suspect the cost gap would be a lot less if the alternative were micromanufacturing in a small industrial district on the Emilia-Romagna model, with garage manufacturers serving local markets on a JIT basis.

[david foster]

One thing that's unlikely to help is the appointment of Obama's "manufacturing czar," Ron Bloom. If we really needed to have such a thing as a manufacturing czar, then IMNSHO it should have been someone with experience in actually running a manufacturing business--either as CEO of a stand-alone business or business unit GM for a larger company--over an extended period of time. Ideally, we'd have someone who had worked his way up from the shop floor.

Instead, we've got another investment banker.

[Adam]

I found this article by James Fallows of the Atlantic very helpful: http://www.theatlantic.com/politics/foreign/fall1f.htm. I agree that America needs an industrial policy even if it harms free trade. Also, why has America adopted an agricultural policy and not an industrial policy? That's another discrepancy I've never understood.

[Karen Wilhelm]

Why do we continue to try to explain economic issues with simplistic concepts such as supply and demand? Adam Smith wrote "Wealth of Nations" in 1776 and we still cling to his basic observations.

Supply and demand assumes that all goods are identical commodities -- the pin factory being the example. Yet I've been trying to sew with a new box of straight pins that includes a good number with NO POINTS. True story.

Supply and demand, labor and manufacturing, skill and work that requires skill, are all subject to asymmetry of geographic location, information, number and degree. A Nobel Prize was awarded for this idea in the last decade.

Jobs are plentiful somewhere--available talent elsewhere doesn't know. Wages alone don't determine that people will flow to where the jobs are. As recognized here, but not where decisions are made, costs are incurred asymmetrically in many points, not only where labor costs are incurred.

The idea that knowledge is carried away as experienced people retire is asymetrically distributed. The decisions that experienced people should be induced to retire early are made by people whose idea set doesn't include that one.

Income is obviously asymmetrically destributed. Are union workers overpaid, or is it a societal benefit that so many of their children have gone to college and become doctors, nurses and engineers?

Until we replace Economics 101 with a deeper inquiry into asymmetry and how it works, we can never understand why macroeconomics and microeconomics create our economic world.

[KELLI]

I never could understand how our politicians who voted for outsourcing and sending manufacturing jobs to other countries (and away from American workers) could ever believe that this practice wouldn't ruin America - and it has in my opinion, done just that! It has been obvious to most citizens that this massive unemployment would happen; and then when you add the huge amount of illegal immigrants to the mix (displacing more American workers) - well, we have just what was planned. . . . But, who planned it and why? really why?
It wasn't only for the greed of these large corporations. . . .

Are they realizing the wrongs - finally. I hope they do decide to bring the jobs back, or America is doomed to become a 3rd World country as some politicians said a few years ago, would happen.

[Tony]

EDN has some interesting articles on outsourcing to China:
http://www.edn.com/article/CA6702291.html
http://www.edn.com/blog/400000040/post/820011882.html

My quick thoughts:
1. I don't think Mr. Huang really understands lean.
2. I suspect he may be in for some big surprises. Outsourcing to China can be full of pitfalls (just read the China Law Blog for many examples).
3. Is he aware of the counterfeit problem? Expecting that the board "will smoke the first time." is pretty scary. Sure, maybe he can fix the board so it won't -- but is he sure his cheap vendors won't change again?