Will Others Follow GE, Apple With In-Sourcing Trend?

By Josh Wolonick  DEC 07, 2012 3:25 PM

With GE and Apple leading the way, manufacturing slowly returns to America

 


MINYANVILLE ORIGINAL In the 1960s, Harvard economist Raymond Vernon described a cycle of manufacturing that proved to be, for a few decades at least, very accurate. He predicted that with its wealth and technological prowess, the US would hold an overwhelming advantage in making high-quality products. As the markets grew, manufacturing would switch over to low-wage countries as increasing competition would make cost a more critical concern. This cycle, of course, came to fruition. But by the late 1990s, with the Internet making globalization inevitable, companies felt confident enough with communication technology to skip that first domestic production phase and jump immediately to outsourcing. Vernon’s cycle was seemingly thrown off the tracks, but perhaps a new cycle is coming into play because manufacturing is returning to America, and it’s not just for political reasons -- itt’s smart business, too. 

In an interview with Bloomberg BusinessweekApple Inc. (NASDAQ:AAPL) CEO Tim Cook announced that the company intends to spend $100 million to begin building Macs in the US next year. He cites a feeling of responsibility to America and its workers to create jobs, and the move will certainly be popular with politicians, as well as with consumers. This announcement is not coming out of nowhere; Apple has already begun producing more of its products stateside, but it also follows a bigger trend to bring labor and manufacturing back to the United States. On the vanguard of the the trend is General Electric Company (NYSE:GE).

In the December 2012 issue of The Atlantic, Charles Fishman’s article “The Insourcing Boom” focuses on GE as a central figure in the startling and seemingly smart move to bring more manufacturing back stateside. The company’s Appliance Park in Louisville, KY, once the center of American appliance production (it had its own zipcode -- 40225), had only 1,863 employees in 2011 as opposed to 23,000 in 1973. But in February, GE built its first new assembly line 55 years and in March, the company built another. By the end of the year, the factory will employ 3,600 employees, a 90% increase from last year. As GE CEO Jeff Immelt told the Harvard Business Review in March, outsourcing is “quickly becoming mostly outdated as a business model for GE appliances.” The company, a major Dow (INDEXDJX:.DJI) component, will spend $800 million on the new developments.

Immelt’s comments reflect the work of Harry Moser, an MIT-trained engineer who founded the Reshoring Initiative in 2010 to help companies assess where best to manufacture their products (and to push for domestic production). “The way we see it, about 60% of the companies that offshored manufacturing didn’t really do the math. They looked at the labor rate; they didn’t look at the hidden costs.”

Outsourcing has simply become more expensive. Oil prices have tripled since 2000 and have increased the price for cargo-shipping. Wages in China, which is --- along with India and Indonesia -- one of the major recipients of outsourced jobs, are up five times since 2000, and are expected to increase at a rate of 18% per year. In America, the natural gas boom has lowered energy costs for domestic manufacturing and US labor unions have lightened up demands and settled for lower wages.

In addition to all the news about in-sourcing, US domestic oil output has reached a 15-year high, thanks in large part to production increases in North Dakota, where hydraulic fracturing has allowed energy companies to tap into shale formations with pockets of oil and natural gas that were once thought unreachable. Of course, the environmental costs of fracking are potentially very high.

The question is: What will this trend of in-sourcing do for the American economy, and for the America worker? Despite these recent and exciting announcements, it is highly improbable that manufacturing will ever be central to America again. In the 1960s, GE’s Appliance Park produced 250,000 appliances per month. Today it turns out almost that much with one-third of the workers. With current technology, productivity is just too high.

As Fishman says in his article, “You simply can’t save money chasing wages anymore.” GE is making a smart financial decision in bringing some manufacturing home, lowering material cost and labor required (actual in-person collaboration between workers and designers allows for cuts of inefficient components and steps), while raising quality. Apple’s Tim Cook feels a responsibility to make jobs for America, but I assume he also sees that outsourcing just isn’t as good a business practice as we all once thought it was. Some manufacturing is returning to America. Big companies will probably save money. Politicians and their constituencies will probably be happy about new jobs. “Made in America” will become a more commonplace label -- that is, until Vernon’s cycle shifts again.
No positions in stocks mentioned.