The Reshoring Challenge: Why and How CEOs are Moving…

The Reshoring Challenge: Why and How CEOs are Moving…

Aug 9, 2017

“The Reshoring Challenge: Why and How CEOs are Moving Jobs Back to America”

By William J. Holstein, Chief Executive

For his reshoring initiative, Rongione paid to move unique knitting equipment from China to Pennsylvania in part by using a YouTube video of Jackson to appeal to investors on Kickstarter, the crowdsourcing website.

Bollman, which says it is America’s oldest hat company, with more than $10 million in annual sales, bought the Kangol brand in 2001 from a British company. That company had previously sent all of its custom-made machines dating back to the 1930s and 1940s to southern China, where it made the beret-like Kangol hats. So Bollman, in effect, inherited a factory in China, containing the special machines that performed at much lower costs than any new machine might.

Bollman struggled to manage the factory profitably and ultimately sold it to a Chinese hat maker, but that arrangement fell apart and the idea to simply move the equipment to central Pennsylvania was born. Rongione set aside some of the employee-owned company’s funds, raised some from the state of Pennsylvania and then launched the Kickstarter campaign. Jackson, wearing a t-shirt that reads “Motherfunder,” a slight variation of a word he’s known for uttering on screen, appealed to viewers to support the move. They did, ponying up more than $100,000.

The company recently moved 10 of the knitting machines, is preparing to move dozens more, and is hiring workers at a starting hourly wage of $10.30 an hour. But it is finding that its workers, both new and old, have a big learning curve ahead of them in absorbing how to master the knitting process, which is new to the company.

“Hiring people with the specific knowledge has been virtually impossible,” Rongione says. “No one has the knowledge on this type of equipment.” So the company has brought in experts from Britain who are familiar with the equipment and worked with a local community college in Reading, Pennsylvania, to train students to become apprentices. The final outcome remains uncertain. “We still have a mountain to climb,” Rongione says.

HOMEWARD BOUND
More American CEOs are, in fact, deciding to bring home jobs from China and elsewhere. After going only in one direction for many years, the Reshoring Initiative, based in Kildeer, Illinois, reports that the total number of manufacturing jobs that were created in the U.S. in 2015 slightly exceeded the number of jobs shipped to other countries. It estimates that the combination of reshoring and foreign direct investment brought about 67,000 jobs back to the U.S. in 2015 versus 60,000 that went out, for a small net margin of 7,000 jobs.

About 60% of the jobs returning come from China. The auto industry is the most significant in terms of jobs repatriated, suggesting that large companies are the prime movers. But the Reshoring Initiative says companies of less than $1 billion in annual sales account for about half the jobs being created in the U.S.

The trend lines are not sparking the kind of celebration many reshoring advocates might have hoped for, at least not yet. One reason is that the presidential campaign rhetoric has politicized the issue so deeply that major companies such as Caterpillar, NCR and Ford Motor, all of which have brought some jobs home, decline to discuss the issue.

Ford and the Carrier air conditioner unit of United Technologies are engaged in public slanging matches with Republican frontrunner Donald Trump because of plans to move production to Mexico and those CEOs are trying to maintain low profiles. Others have suffered unintended outcomes: GE made a splash by moving the production of water heaters from China to its Appliance Park in Louisville, Kentucky—and then proceeded to sell the entire appliance division to Haier of China.

Another reality is that the jobs that do come home seem to be very different than those that left. The rough rule of thumb is that if five American jobs went to China, it required perhaps 12 Chinese workers to do the same work because fewer workers there are trained in multiple functions. But when those jobs come home, they may be only three jobs, and they require higher levels of skills to work with computers and automated production equipment. That’s not good for millions of displaced American workers, who may have only high school educations.

Moreover, millions of jobs that went offshore may never come back. Harry C. Moser, founder and president of the Reshoring Initiative, which has emerged as the most definitive source of information on the trend, estimates that U.S. manufacturers would bring back home 1 million jobs if they did comprehensive evaluations of their true offshore production costs.

HAMPERED BY REGULATION AND TAXATION
But Moser reckons that another 3 million jobs will not return to American soil unless governments undertake sweeping changes to the business and tax climate and seek to eliminate the approximately $500 billion annual trade deficit. Those challenges seem unlikely in the current polarized political environment.

One bright spot among major companies, ironically, is Walmart, which helped spark the flood of jobs to low-cost locations in the first place. The company announced its Made in USA initiative in January 2013, vowing to buy $250 billion more in products from U.S. suppliers over a 10-year period. Cindi Marsiglio, the Walmart vice president overseeing the U.S. sourcing push, says the retailer is on track to achieve that goal, finding American suppliers of such basic items as towels and socks.

There are three elements to its strategy. One is to buy more from exiting U.S. suppliers already manufacturing in the States. The second is encouraging reshoring and the third is finding new U.S. suppliers.

This strategy appears to be much more than a publicity stunt aimed at improving the image of Walmart as the giant retailer that destroys smaller retailers and good jobs in the communities where it operates. Walmart is finding that the Made in USA initiative makes solid business sense because it can move production closer to its customers, allowing its suppliers to respond faster to new designs or new trends. It can also manage inventories more efficiently.

Many companies that have reshored jobs discover big gains in reducing the “coordination costs” of having multiple executives on long business trips and trying to communicate across 12 time zones. Others, like NCR, found that locating production closer to customers improves the company’s ability to innovate because customer needs can be more rapidly communicated to engineers and others who design products.

At the same time, the macroeconomic conditions that encouraged wholesale outsourcing are changing. “Labor conditions and wages are rising overseas,” Marsiglio says. Transportation costs, muted at the moment by cheap oil, also have risen over time. “When you do the math, it became clear that the U.S. was highly competitive again,” she says.

THE PATRIOT FACTOR
Another funny thing happened on the way to the forum; some Americans are now saying they care where their products are made. “They are telling us that that is impacting their purchase decisions,” Marsiglio says.

She declines to say that American consumers don’t trust Chinese products—because Walmart still sells billions of dollars’ worth of goods made in China. Instead, she puts the emphasis on the positive—Americans want anything they eat themselves or feed to their children or pets to be made in America.

So Walmart is putting “Made in USA” labels on the front of packages of those products. “When I walk through the aisles of a Walmart today, I can much more easily find things that are made in the USA,” she says.

Walmart created its strategy working with Boston Consulting Group (BCG), which estimates that by the end of the 10-year period, the retail giant will have created 250,000 direct manufacturing jobs in the U.S. and 750,000 supporting jobs, for a total of 1 million.

What kind of jobs are they? “Commonly, you will hear the statement ‘that when manufacturing comes back, the jobs will come back too,’” Marsiglio says. But they are different jobs. “When I walk through automated factories making products for us, people may be [wearing white coats] and using their iPads to check the machinery,” she says. Across the board, American manufacturers are becoming more technology-intensive, using wireless communications, for example, to link supply chains with manufacturing and assembly lines.

DOMESTIC FROM THE START
Suppliers who went global but maintained some production in the U.S. are better able to respond to Walmart’s initiative because they have some infrastructure and some employees in place. But starting from scratch is much more difficult, as John Dammermann, CEO of Impact Innovations, discovered.

Impact Innovations, an employee-owned company with about $150 million in annual sales based in Clara City, Minnesota, specializes in making seasonal holiday items for major retailers, such as Walmart, Kmart, Michael’s and Big Lots. It sells ornaments, Christmas stockings and bows, indoor and outdoor décor and wrapping paper. For years, these items have been made mostly in China.

In 2011, Impact Innovations acquired a gift-wrap competitor, Cleo, in Memphis, Tennessee. Cleo had shifted half of its gift-wrap-making to China and Impact Innovations completed that offshoring process. Impact Innovations did not acquire Cleo’s old printing presses, but kept its converting equipment. Those converters allowed the company to cut large runs of wrapping paper mass-produced in China into smaller packages of paper that could be sold at retail.

Dammermann approached Walmart in 2012 about bringing some of the gift-wrap production back to the U.S. His labor costs in China were increasing by 15 to 20 percent each year and he reckoned that wrapping paper was less labor-intensive than ornaments or stockings. So it was the product closest to the tipping point of being cheaper to make domestically.

But he needed assurances that his contracts with Walmart would last long enough to justify buying new printing presses. The retailer made the commitment and Impact Innovations invested $7 million in two presses, installing one in Memphis in June 2014 and then a second in January 2016. It expects to spend another $3 million this year. “The commitment from Walmart gave us the confidence to go out and invest,” Dammermann says. “A lot of big, public corporations would not want to make the commitment we did because it’s a long-term payoff. We just decided it was the right thing to do.”

It shifted half of its paper sales to Walmart to Memphis-based production in 2015; and this year, more than half of all the gift wrap it sells to Walmart will be made in Tennessee, not just converted. Just as Rongione at Bollman Hat discovered, however, finding the right people to operate the new printing presses has been a challenge. Impact Innovations has added 25 jobs to its staff of 35, as well as 100 seasonal jobs. Some employees are from the company that got bought out, Cleo, but even they need help with the newer equipment. “There is certainly more technology involved and there has been some retraining,” Dammermann explains.

THE PEOPLE PROBLEM
He is frustrated that more young people are not interested in manufacturing jobs. “The perception of manufacturing jobs may be that they are somehow dirty and manual,” he says. “But it’s much more technology-driven. There is much more automation. The jobs can be very rewarding and challenging.”

However, it’s a tough sell. “I don’t know anyone who wouldn’t prefer to manufacture in the U.S.,” Dammermann continues. “It’s just easier to manage. I think we will continue to see more manufacturing coming back, but the workforce is going to have to be here for it. That means different types of training and education. It’s not like flipping a switch and everything moves back. It’s a process.”

The bottom line: The reshoring of American manufacturing is real, but it will require a great deal of effort over several years before it becomes a major contributor to U.S. economic growth.

Read more:
Manufacturers: Are You Ready to Reshore?

 

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