As costs in China rise, some manufacturing jobs return to USA – Tampabay.com

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.