Are Manufacturers Coming Home?
On Monday, 24 August 2009, the Wall Street Journal published an article featuring the story of Mr. Farouk, an appliance maker, who decided to pull his production out of China to produce in Texas. What are the reasons he cited for his decision to move production out of a low-cost country?
Given these criteria, China still outperforms the Southeast Asian nations, even after the global economic crisis. In response to the crisis, he has pushed the low-end production lines out of China to Vietnam, Malaysia, Bangladesh, and kept the higher-end products for critical customers in China, local to his operation, to control oversight. The WSJ article did not clarify where Mr. Farouk was based, the U.S. or China. Perhaps he was not able to control his China-based manufacturing operation because he was not living in Shenzhen, or had not hired a trusted manager to run the enterprise on his behalf. This piece of information would be critical in determining whether or not his story is a bellwether for China manufacturing. Nonetheless debates are arising within the Qingdao business community regarding the rationale of continuing to manufacture in China. These are not coming from some non-U.S. foreign members who are benefiting indirectly from the Chinese stimulus package which is aimed largely at improving infrastructure, for example, the high speed rail system, but from U.S. members who are concerned about antagonistic policies coming from China and the U.S., regarding taxes and savings. The information is still unclear, but it appears that some policy makers on both sides would like to reverse the current outsourcing model. What do you think? Does this story foretell the pulling out of manufacturers from low-cost countries? Or will each individual industry and company find a unique solution? What are your thoughts on the related policies being put forward by both the U.S. and China, or other foreign countries and China?
- better control over manufacturing and distribution
- better control of quality and inventory
- easier to fight fakes
- higher profit margins -- due to better quality and a better image
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"I think you're starting to see more manufacturers rethinking outsourcing," says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public policy and research group based in Arlington, Va., calling a June speech by General Electric Co. CEO Jeffrey Immelt, where he said that overseas outsourcing had gone too far and that U.S. companies needed to expand domestic production, a "bellwether of what's happening in manufacturing."
Besides GE's efforts to manufacture more within the U.S., other companies such as St. Louis-based electrical-equipment maker Emerson has shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to be closer to customers in North America.
Due primarily to the fallout of the global economic crisis, but increasingly due to antagonistic policies between China and the U.S. and China and other foreign nations, Andrew Hupert of ChinaSolved writes, "[t]he sun is setting on China as a manufacturing center." And if they are fortunate, "China’s millions of unemployed grads are more likely to end up at a workstation in an office building than on a production line in a factory." Let us not forget that technology, namely the increasing cost effectiveness of industrial automation, also plays a constant role in reducing the size of the manufacturing workforce worldwide. Last week I had lunch with Umesh Tiwari of Utopia Fashions. After we ordered Umesh began to talk about sourcing. He has been manufacturing in China for about 5 years and had overseen several factories in Indonesia for eight years prior. He knows the textile industry and Southeast Asia well. He emphasized that for his industry an ideal sourcing country should have the following characteristics:
- raw materials,
- space for factories,
- a sizable labor supply,
- strict governance,
- political stability,
- excellent infrastructure and logistics, including a highway system, a railway system, airports, ocean ports, and
- electricity generation and distribution networks.
Given these criteria, China still outperforms the Southeast Asian nations, even after the global economic crisis. In response to the crisis, he has pushed the low-end production lines out of China to Vietnam, Malaysia, Bangladesh, and kept the higher-end products for critical customers in China, local to his operation, to control oversight. The WSJ article did not clarify where Mr. Farouk was based, the U.S. or China. Perhaps he was not able to control his China-based manufacturing operation because he was not living in Shenzhen, or had not hired a trusted manager to run the enterprise on his behalf. This piece of information would be critical in determining whether or not his story is a bellwether for China manufacturing. Nonetheless debates are arising within the Qingdao business community regarding the rationale of continuing to manufacture in China. These are not coming from some non-U.S. foreign members who are benefiting indirectly from the Chinese stimulus package which is aimed largely at improving infrastructure, for example, the high speed rail system, but from U.S. members who are concerned about antagonistic policies coming from China and the U.S., regarding taxes and savings. The information is still unclear, but it appears that some policy makers on both sides would like to reverse the current outsourcing model. What do you think? Does this story foretell the pulling out of manufacturers from low-cost countries? Or will each individual industry and company find a unique solution? What are your thoughts on the related policies being put forward by both the U.S. and China, or other foreign countries and China?
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