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As costs in China rise, some manufacturing jobs return to USA

I-Con Systems, a Seminole County company that makes plumbing control systems for correctional institutions, had been manufacturing its components in China for about a decade when CEO Shawn Bush began thinking about moving manufacturing operations back to Florida.

Like most other manufacturers, Bush says he was originally lured to China by lower labor costs, but had encountered a number of problems in dealing with his overseas manufacturer, including the language barrier, a lack of consistent quality and a time lag in receiving material.

A critical moment came when all three problems occurred at the same time with a key vendor.

"We had a large shipment that was delayed by a vendor, and when it was received, it did not pass our quality control," says Bush, who was unable to communicate with the vendor to explain the issue and get it corrected in a timely fashion.

After scrambling to save the customer and the project, Bush decided that the offshore relationship was not working and began acquiring equipment, personnel and the skills to bring the key items in-house to his factory in Oviedo.

"We began moving manufacturing about two years ago and now do 90 percent of our manufacturing in-house," says Bush, who has hired 15 additional workers and purchased more than $300,000 in equipment to aid his growing manufacturing operation.

The "reshoring" trend has picked up pace across the United States as labor costs in China, India and other countries have begun to rise. While American wages have flatlined over the past several years, wages for the typical Chinese factory worker have increased almost sixfold over the past decade, from 62 cents an hour in 2003 to about $3.50 an hour today.

Although that's still dramatically lower than the average hourly wage of around $19.30 for a U.S. factory worker, the higher productivity of American workers means China's labor-cost advantage drops to about 55 percent. In addition to wage inflation, a higher rate of employee turnover, a sharp rise in China's currency and intellectual property theft are also driving up manufacturing costs in China, along with the costs associated with difficulties like those Bush encountered.

The natural gas boom, meanwhile, has dramatically reduced energy costs for U.S.-based factories.

As the manufacturing cost difference between the United States and China shrinks, it often makes better sense to bring production closer to market, says Dave Sievers, a principal at the Hackett Group, a Miami consulting firm that advises manufacturers on offshoring and reshoring.

Sievers says companies that manufacture closer to home can be more responsive to customers who need finely tailored specifications or customized changes to the products they've ordered.

"It tends to be better to have the production closer to the market," he says, "so it's easier to provide those value-added services, so you can be more responsive."

When U.S. Block Windows, an acrylic block window manufacturer in Pensacola, bought out Hy-Lite in 2009, Hy-Lite was outsourcing most of its injection molding to China. Roger Murphy, president of Hy-Lite/U.S. Block Windows, says steep shipping and warehousing costs and logistical headaches convinced the company to bring back that work.

Because of long lead times in China, Hy-Lite had to keep large inventories in stock to cover potential orders. Carrying that much excess inventory, Murphy says, is a "high-risk proposition" because it's nearly impossible to anticipate which colors, designs and models customers may want.

By moving production in-house, Murphy says, Hy-Lite avoided keeping several hundred thousand dollars' worth of inventory on hand, saved on warehousing costs and reduced the risk associated with carrying goods that go unsold. Reshoring also enabled the company to provide better service to his customers. Another added benefit for manufacturers is the goodwill engendered among customers by the "Made in the U.S.A." label. "It certainly doesn't hurt," says Murphy.

While it's unclear precisely how many manufacturing jobs have shifted back to the Sunshine State, Florida Trend was able to count about 1,500 reshored jobs at a dozen companies.

That trend, however, appears unlikely to make more than a dent in 80,000 factory jobs that disappeared in Florida between November 2007 and November 2010. As of July, manufacturing employment in Florida stood at around 315,000 — a 2 percent rebound from its low point in 2010, but still far short of 390,000 manufacturing jobs the state boasted in 2007. The sector makes up 5.3 percent of the state GDP.

In addition, companies that bring jobs back from overseas tend to couple the move with capital expenditures to increase automation — meaning that when a business reshores, 300 jobs in China doesn't translate into 300 jobs in the United States. The more labor-intensive a manufacturing operation is, the more likely it is to stay overseas, company owners say.

"The cost of sophisticated machinery, automated machinery has come down. The advances in technology in every sector in this world now are moving at a mindboggling speed," says Eric Higgs, CEO of Luma Stream. The St. Petersburg company has been developing and manufacturing its products in Canada and Taiwan but is now consolidating its operations in St. Petersburg and is partnering with St. Petersburg College to provide hands-on manufacturing training and help create a labor pool for about 1,000 jobs the company expects to create over the next five years.

"You can have one person that's running two or three machines," says Higgs, "instead of one person for each machine."

Even so, the Boston Consulting Group estimates that the reshoring trend will directly and indirectly create 2 million to 3 million jobs in the United States over the next decade, reducing unemployment as much as 1.5 to 2 percentage points and lowering the non-oil-related merchandise deficit by 25 percent to 30 percent. The consulting firm calls its predictions conservative.

This story originally appeared in Florida Trend magazine. To read other Florida Trend stories and interviews, go to floridatrend.com.

The tipping point

Research from the Hackett Group shows that companies begin to consider outsourcing when the cost of manufacturing overseas appears to be 20 percent less than making goods in the United States. But companies that have outsourced jobs will consider moving them back when that cost gap narrows to 16 percent. The consulting firm predicts that the "total landed cost gap" with China will reach 16 percent some time this year.

Coming home

A 2012 survey by the MIT Forum for Supply Chain Innovation revealed that about a third of U.S. manufacturing companies are considering bringing jobs back to the U.S. Among their top main reasons for reshoring:

Time-to-market

73.7%

Cost

reductions

63.9%

Product quality

62.2%

More control

56.8%

Hidden supply chain management costs

51.4%

Protect

intellectual property

48.5%

Reshorers

Some Florida companies that are bringing jobs back from overseas:

NatLabs: Automation enabled the Bradenton manufacturer of dental prosthetics to move much of its production from China back to Florida. The company aims to phase out 200 jobs in China and move all production back to the United States over the next five years, creating about 283 jobs.

SB Manufacturing: The company plans to move manufacturing of aluminum castings for the automotive parts industry from China to Pasco County. Its reshoring effort is expected to create 75 jobs with an average annual wage of $40,000, which is 126 percent of the Pasco's average annual wage.

RF Micro Devices: The global designer and manufacturer of semiconductor components, which already employs 68 workers in Hernando County, is hiring another 15 to do work previously done in China. The company received a $30,000 job creation incentive from the Hernando County Commission.

Sleek Audio: After experiencing quality-control problems and other headaches, Sleek Audio moved production of high-end earphones from Chinese suppliers to its plant in Manatee County in 2010.

Genicon: The Winter Park company, which makes laparoscopic surgical equipment, moved its manufacturing back from China 2009 after encountering problems with quality and intellectual property theft. The reshoring effort created 50 jobs.

Aquateko: The Ponte Vedra Beach fishing products company used to produce its Knot2Kinky fishing line leader in Taiwan. Today, the product is produced and packed in Jacksonville by employees with disabilities through an employment program run by the nonprofit Pine Castle. Pine Castle employees also package Aquateko's "InvisaSwivel," which allows bait to twirl in the water or a hooked fish to spin without twisting the fishing line. The company says the arrangement has improved the quality of its product line and lowered costs through savings on freight costs and import duties.

High Concentration

Counties where manufacturing jobs are at least 6 percent of total employment.

County % of jobs in manufacturing

Taylor 22.2%

Dixie 16.4

Brevard 11.0

Putnam 10.4

Wakulla 10.3

Madison 10.2

Manatee 8.4

Pinellas 8

Gadsden 7.8

Polk 7.5

Columbia 7.4

Marion 7.3

Levy 6.5

Nassau 6.4

Source: Florida Department of Economic Opportunity, Bureau of Labor Market Statistics, Quarterly Census of Employment and Wages, in cooperation with the U.S. Department of Labor, Bureau of Labor Statistics. Data from 2012.

*Data not available for Hamilton, Liberty, Suwannee, Union and Washington counties.

Biggest manufacturers in FloridaRevenue (billions)

Jabil Circuit (St. Petersburg)

$17.2

Harris (Melbourne)

$5.5

Watsco (Coconut Grove)

$3.4

B/E Aerospace (Wellington)

$3.1

Roper Industries (Sarasota)

$3

Tupperware Brands (Orlando)

$2.6

Cott (Tampa)

$2.3

Arthrex (Naples)

$1.3

Elizabeth Arden (Miramar)

$1.2

Vector Group (Miami)

$1.1

As costs in China rise, some manufacturing jobs return to USA 11/15/13 [Last modified: Friday, November 15, 2013 6:24pm]
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