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6 reasons manufacturing is returning to North America

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Lower transportation costs, competitive wages, technology and employee productivity have made North America a manufacturing destination. In a sign of this manufacturing renaissance, GE, one of the world's largest appliance manufacturers, gearing up its almost-dormant Louisville facilities for new product development and production.

Renewed sign of the times: GE's resurging mega-facility. Photo: Jason Hiner, TechRepublic

In a new report in The Atlantic, Charles Fishman describes how the "insourcing" boom is bringing back manufacturing to North American shores.

He cites a number of reasons why manufacturing is suddenly so attractive again:

  1. High transportation costs: "Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then."
  2. Lower domestic energy costs: "The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home," Fishman relates, adding that "natural gas now costs four times as much in Asia as it does in the U.S."
  3. Offshore wages are rising: "In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18% a year."
  4. Labor relations are more cooperative: "Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as 'Strike City,'" says Fishman.
  5. Employee productivity is rising: "Labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore."
  6. Offshore factories can't keep up with design and technology changes: "As products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific. Factories take a while to settle into a new product, a new design. They face a learning curve. But models that have a run of only a couple years become outdated just as the assembly line starts to hum. That makes using faraway factories challenging, even if they are cheap."

Fishman cites GE's Appliance Park, a mega-site of buildings that was established outside of Louisville, Kentucky in the early 1950s, with employment at the site peaking at 23,000 in 1973. The move to offshore manufacturing eventually dwindled the Appliance Park workforce to 1,863 in 2011. Over the past year, however, two assembly lines have been launched at the facility -- one for energy-efficient water heaters and the other for a high-tech refrigerator. Plans are to launch a third assembly line for stainless steel dishwashers in early 2013.

Jason Hiner of TechRepublic (a SmartPlanet sister site) describes the role of information technology in restarting the engines of Appliance Park.

The ability to keep production close to engineering and design is an important aspect of innovation, Fishman adds:

"Bringing jobs back to Appliance Park solves a problem. It is sparking a wave of fresh innovation in GE’s appliances—every major appliance line has been redesigned or will be in the next two years—and the experience of 'big room' redesign, involving a whole team, is itself inspiring further, faster advances. In fact, insourcing solves a whole bundle of problems—it simplifies transportation; it gives people confidence in the competitive security of their ideas; it lets companies manage costs with real transparency and close to home; it means a company can be as nimble as it wants to be, because the Pacific Ocean isn’t standing in the way of getting the right product to the right customer."

The gains to made from the increased innovation possible with in-sourcing back to North American shores more than offsets any gains made by using cheap labor, Fishman points out.

Another force that may bring manufacturing back to North American shores -- but not addressed by Fishman in this article -- is the rise of 3D printing (or "additive manufacturing" as it's called in industrial circles). The ability to mass-produce highly customized products with low-priced 3D printers will dramatically lower production costs, and there is no reason why it needs to happen apart from the design source.

— By on December 5, 2012, 6:41 AM PST

Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure