Monday, October 17, 2011

"Back in the USA" - Seattle Manufacturer Provides A Lesson on Reshoring. Expect More of It. Lots More

The NY Times recently featured a Seattle-based company named "Taphandles" that has brought some of its manufacturing of custom beer taps and beer-marketing products (see photo above) back to the United States from China as many of the economic and cost advantages of manufacturing have started to shift back to the United States, including:

1. Manufacturing wages in China continue to increase at 15-20% per year on average, and have actually increased by a whopping 300% for Taphandles since it opened a Chinese factory in 2006.  In contrast, manufacturing wages in the U.S. have remained relatively flat, or have even decreased in some industries that have adopted a two-tier wage structure. 


2. The lead time for Taphandles' orders coming from China is three weeks, compared to a much shorter time for domestic production, which improves customer satisfaction for Taphandles' clients.   

3. In addition to rising wages, the Chinese currency has appreciated by 23% over the last five years, making production there much more expensive for American firms like Taphandles. 

4. Taphandles owner Paul Fitcher predicts that international shipping costs will continue to rise along with higher oil prices, which was another factor in his decision to "reshore" manufacturing back to the U.S.  

Bottom Line: Look for more and more manufacturing production to come back to the U.S. from China in the future, as China's once-significant labor cost advantage continues to shrink.  According to a recent Boston Consulting  Group report, the example of Taphandles is part of an emerging trend that will accelerate in the next five years, and in the process could create 2 to 3 million American manufacturing jobs from the reshoring of production back to the U.S.

38 Comments:

At 10/17/2011 2:14 PM, Blogger Marko said...

Just imagine how much more of this would happen if our federal government was actually pursuing a policy of improving the environment for businesses!

Of course, this company seems to be betting that the economy in the U.S. will not improve any time soon, keeping down manufacturing labor rates. If things start to improve, he may just ship out again (assuming other things, like tax rates, don't improve).

 
At 10/17/2011 3:00 PM, Blogger Benjamin said...

If you want lower federal income taxes, then figure out how to cut defense, homeland security, the VA, USDA, Interior, and Commerce. The agencies mentioned consume 70 percent of federal spending financed by income taxes, outside of debt.

Agency spending is out of control, boosted by Congressman who have federal agency installations in their districts, or subsidy-dependent constituents, such as farmers and federal employees.

Lower payroll taxes (that is, taxes on workers) can be had by cutting Medicare and Social Security.

 
At 10/17/2011 3:22 PM, Blogger Jim said...

There is another reason manufacturing is making a comeback.

For years the consultant class told us that companies should concentrate on their strengths and outsource where they can. Except when you do that, you create your future competitor. Think Asus, created by Dell.

Perhaps worse, when organizations divorce themselves from significant portions of their business, even by geography, it turns out they lose the emergent ideas that goes with a more holistic congregation of talents.

 
At 10/17/2011 4:03 PM, Blogger Jet Beagle said...

If manufacturing is brought back to the U.S. because offshoring costs have increased, I think it unlikely that this is causing an increase in jobs in the U.S. Certainly manufacturing jobs will be created here that did not exist before. That's the "seen" effect. But the "unseen" effect - the reduction in overall U.S. purchasing power due to price increases of manufactured goods - will likely cause other jobs to be lost.

 
At 10/17/2011 4:23 PM, Blogger Buddy R Pacifico said...

Jet Beagle,

All four of the reasons cited by the Seattle based manufacturer for on-shoring are competitive factors. I think your "unseen" effects are econ chatter phantoms not seen in the marketplace.

 
At 10/17/2011 5:27 PM, Blogger sethstorm said...

Then sending something offshore is wasting time.

 
At 10/17/2011 5:34 PM, Blogger sethstorm said...


Jet Beagle said...

Then keep the increases going so that offshoring is something done with oil rigs and not US jobs.

What says that businesses will threaten to offshore for a third tier that is lower? The better way is to end the danegelding that business has done with offshoring.

We don't need 2-3 million jobs, we need 30 million+. Offshoring will only make the pit deeper.

 
At 10/17/2011 7:25 PM, Blogger sethstorm said...


Just imagine how much more of this would happen if our federal government was actually pursuing a policy of improving the environment for businesses!

Only if you are willing to make the same effort towards those that are not businesses. That is, making it better for those that work for those businesses - by giving more leverage to those people over businesses.

Pass the tariff bill to lock in the production to the US. When things improve, other countries are still more expensive, and the US still wins.

 
At 10/17/2011 7:31 PM, Blogger aorod said...

If we had lower energy prices, that would increase the incentives to bring back manufacturing. What effect have energy prices had on manufacturing in China?

 
At 10/17/2011 7:46 PM, Blogger Craig said...

China is losing its competitive advantage because monetary inflation is wiping out its price advantage. Chinese wages are rising far above productivity and Chinese prices are rising to the extent that Chinese consumers find it advantageous to buy foreign goods.

The U.S. did the same in the seventies. How do you think the Rust Bowl was created?

 
At 10/17/2011 8:26 PM, Blogger sethstorm said...


The U.S. did the same in the seventies. How do you think the Rust Bowl was created?

A full fledged opposition by business to US manufacturing, using foreign manufacturing as a threat to get concessions from US citizens.

 
At 10/17/2011 8:44 PM, Blogger Bukco13 said...

I think the important thing to note with these developments is that markets naturally shift. Yes it's true that costs in China are increasing, but similarly manufacturing techniques are becoming more sophisticated as well, along with increased worker productivity and sophisticated, modern infrastructure. Meanwhile, U.S. manufacturing is similarly adjusting to account for these shifts, reclaiming market share where it can.

This evolution in China manufacturing is important to remember when trying to put such rapid development into perspective. There is a useful white paper I suggest reading on the Evolution of China Exports from the point of view of an American trade company that has been working in China for over 30 years as a way to get increased perspective.

 
At 10/18/2011 1:30 AM, Blogger Ron H. said...

"A full fledged opposition by business to US manufacturing, using foreign manufacturing as a threat to get concessions from US citizens."

Go back to sleep, seth.

 
At 10/18/2011 5:04 AM, Blogger Jet Beagle said...

Buddy,

You misunderstood my comment. I am not arguing that the act of re-shoring will necessarily cause a reduction in jobs. Rather, I am arguing this: when costs to offshore increase over what they once were, onshore jobs are not likely to increase in total.

Yes, a manufacturing operation that has been re-shored will add some U.S. manufacturing jobs. But, if that's due to an increase in costs - meaning that low-cost offshoring is no longer available - then the purchasing power of U.S. consumers is reduced. Those consumers will have to reduce some consumption of goods and services somewhere to make up for the higher cost of the previously cheap offshored good. That's the unseen part of an increase in prices, and is not what you dismiss as "econ chatter phantoms".

 
At 10/18/2011 9:21 AM, Blogger Buddy R Pacifico said...

Jet,

Thanks for your reply but I still think your "unseen" comment is wrong. Productivity gains, via manufacturing process improvements and competitive wages, are driving costs down for U.S. manufactured products.

Here is a Q & A from the taphandle co. CEO, Paul Fichter, that is telling on U.S. mfrg now:

". What type of workforce will you need?

A. Mostly skilled technicians who can use computer numerical-controlled machines, which allow us to cut many products at once. Because Boeing is nearby, we've got a great labor pool. The cost of computer automation in the U.S. has also dropped. In China, humans do the same work on much simpler machines. So, we're replacing Chinese labor with machines run by U.S. workers. The machines will make 10 times more product than a person could in China."


This is from an article in the Seattle Times.

The loss in purchasing power, due to higher prices from on-shoring, is not of concern. Inflation in raw material prices is a concern, but this is not a result of on-shoring.

 
At 10/18/2011 5:32 PM, Blogger edna thackeray said...

i certainly hope alot of commerce comes back to the country that once led the world

and maybe our former way of life will return because what we have now is causing social havoc and devastation to Americans

 
At 10/18/2011 5:34 PM, Blogger edna thackeray said...

the global experiment we have found ourselves a part of is unraveling for many reasons
it is time, and will always be time, to take care of Americans who built this nation into the greatest nation on earth

 
At 10/18/2011 6:13 PM, Blogger sethstorm said...

Buddy R Pacifico said...
Only good if they're willing to do OJT.

Ron H.
There's nothing wrong with locking in the gains to the US. The problem is offshoring, the solution is to kill it.

 
At 10/18/2011 6:15 PM, Blogger sethstorm said...

Jet Beagle said...
The problem is that the "cheap offshored good" has so many corners cut in it, that you end up buying another one just to fix it. You end up paying the same price if not more than the product that wasn't offshored.

 
At 10/18/2011 6:39 PM, Blogger klondike said...

Imagine,

Jobs coming back to the USA and all without the need to pass legislation or stimulus here at home. It's time the Fed and our politicians step back and let the markets work instead of trying to manipulate currencies, whether the yuan or the dollar. Maybe it's also time for Occupy Wall Street to Occupy the Capitol.

 
At 10/18/2011 6:44 PM, Blogger sethstorm said...


and maybe our former way of life will return because what we have now is causing social havoc and devastation to Americans

Thank businesses for scuttling the economy in the US - for their actions have been the source of havoc and devastation.

The only problem with prosperity, is that some people don't care to see it happen with the wrong politician - even if it means people suffer and are swept under the rug (as many 99'ers have been).

 
At 10/18/2011 6:47 PM, Blogger sethstorm said...


Jobs coming back to the USA and all without the need to pass legislation or stimulus here at home. It's time the Fed and our politicians step back and let the markets work instead of trying to manipulate currencies, whether the yuan or the dollar

The problem is that such action against other currencies would act to ensure those gains stay in the US, and employ US workers.

 
At 10/19/2011 12:41 AM, OpenID chartflyer said...

Jet

Here's why on shoring is beneficial to the US even if US manufactured goods are more expensive. Say an offshore product costs $10 and on shoring it costs $12. Say labour is $4 of that $12. The US consumer is $2 better off than before, which will be spent and create more jobs. Where is the unseen loss of purchasing power? Note that we are just talking about labour, if we factor in all the associated costs sourced locally ie rent, power, insurance, raw materials, packaging etc the benefit to the US is even greater.

 
At 10/19/2011 5:20 AM, Blogger hiteshpatel said...

fan of "UNITED STATES OF AMERICA" hip hip hurray good job man back to america, welcome sir back welcome> good job help your own country help your own country men. it is the time your country need you most and also to world. (BCOZ I AM FROM INDIA) liked the spirit and understanding of this AMERICAN enterpreanur

 
At 10/19/2011 5:33 AM, Blogger Ignacio Escobedo said...

The article is highly misleading or rather incomlete because it does not adress the corporate taxes, that in most cases is the most relevant element of cost.

 
At 10/19/2011 8:04 AM, Blogger PJMFinn said...

Based on the experiences of industry contacts from companies that have expanded operations to China I take the US worker over a Chinese one any day. Over there, the applicants line up when a plant is opened but the day to day production may paint another picture. Union excesses and disruptions aside, production leaves US not because of labor costs but because of the very expensive labyrinth of taxation and tyrannical regulation by an increasing multitude of bureaucracies.

 
At 10/19/2011 8:21 AM, Blogger sethstorm said...


PJMFinn said...

Then make the foreign cost inescapable and expensive compared to that "bureaucratic maze".

 
At 10/19/2011 2:10 PM, Blogger Ron H. said...

chartflyer: "Here's why on shoring is beneficial to the US even if US manufactured goods are more expensive. Say an offshore product costs $10 and on shoring it costs $12. Say labour is $4 of that $12. The US consumer is $2 better off than before, which will be spent and create more jobs. Where is the unseen loss of purchasing power? Note that we are just talking about labour, if we factor in all the associated costs sourced locally ie rent, power, insurance, raw materials, packaging etc the benefit to the US is even greater."

Wait, wait! Do you mean to claim that we are all better off when we spend more for things?

The US consumer is $2 better off if they spend $12 instead of $10?

Consider your own household budget: are you better off when you spend $12 for something instead of $10?

Also consider that when people *choose* to pay less for something, no matter where it's made, it's because they believe they will be better off and have more money left over to buy other things. Why don't you?

I'd suggest you revisit your economics text, if you have any, otherwise I recommend that you visit some for the first time.

 
At 10/19/2011 2:18 PM, Blogger Ron H. said...

Ignacio: "The article is highly misleading or rather incomlete because it does not adress the corporate taxes, that in most cases is the most relevant element of cost."

Yes, in a short article, many details are left out. There was no comparison of electric rates or the cost of insurance, either. Do you have a reference to support your claim that corp taxes are the most relevent element of cost?

 
At 10/19/2011 2:26 PM, Blogger Ron H. said...

"Then make the foreign cost inescapable and expensive compared to that "bureaucratic maze"."

It's possible that PJMFinn has no ability to do that, you silly clown.

 
At 10/19/2011 3:05 PM, Blogger VangelV said...

Bottom Line: Look for more and more manufacturing production to come back to the U.S. from China in the future, as China's once-significant labor cost advantage continues to shrink.

How wonderful. China's wages are going up while American wages are stagnant or falling. Soon Americans will make so little that they can be hired to make cheap toys, brooms, housewares, and low value-added goods. Imagine how great it will be for the optimists like Mark when wages fall so low that American can compete with Africa or South America. If wages fall enough young American women can hire themselves out as nannies or domestic servants for rich Asians as they displace the higher priced Philippine workers.

 
At 10/19/2011 3:07 PM, Blogger count_zero said...

...think how much more of this would happen if O and his cronies were not in DC.

 
At 10/19/2011 6:51 PM, Blogger sethstorm said...


...think how much more of this would happen if O and his cronies were not in DC.

As opposed to cronies of pro-offshoring interests? No thank you.



Ron H. said...

Then the government can make the foreign cost inescapable and expensive compared to that "bureaucratic maze".

(which is what I meant)

 
At 10/19/2011 6:54 PM, Blogger sethstorm said...


VangelV said...

Plenty of Far Easterners will get killed that way if not many more before that ever happens.

There won't be any of them left to serve.

 
At 10/19/2011 8:41 PM, Blogger VangelV said...

Plenty of Far Easterners will get killed that way if not many more before that ever happens.

There won't be any of them left to serve.


Really? You mean that becoming wealthier and healthier has caused Asians to die?

 
At 10/22/2011 12:04 PM, Blogger Tapirking said...

Happy to see this reshoring occurring. I am blogging on this subject and other made in America related topics at simply-american.net. Please visit my blog if you have time. Thanks, John Briggs

 
At 5/18/2012 10:05 PM, Blogger Tapirking said...

Thanks a lot for the article. The reshoring movement is growing slowly. But we shouldn't ignore the great U.S. firms that have never left our country: Wigwam Mills, Hart Schaffner Marx, Homer Laughlin China Company to name but a few. And most of the products produced by these firms are very competitive with foreign goods. Over the last year, I have been buying more products made in the U.S. and have gained a great deal of satisfaction knowing that my purchases are playing a small part in providing employment for other Americans.

All the best,

John Briggs

 
At 5/19/2012 9:07 AM, Blogger VangelV said...

Thanks a lot for the article. The reshoring movement is growing slowly. But we shouldn't ignore the great U.S. firms that have never left our country: Wigwam Mills, Hart Schaffner Marx, Homer Laughlin China Company to name but a few. And most of the products produced by these firms are very competitive with foreign goods. Over the last year, I have been buying more products made in the U.S. and have gained a great deal of satisfaction knowing that my purchases are playing a small part in providing employment for other Americans.

It is insane not to buy products from those most able to make them the most effectively. If you live in New York what is the difference between importing your vehicle from Kentucky and importing it from Germany? And if your argument is followed to its natural path why not only buy the products that are made locally in your own neighbourhood?

 

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