Motorola's new Fort Worth, Texas, facility for manufacturing the Moto X handset.
In recent history, many companies wouldn't even think to establish a manufacturing base in the US. As Hal Sirkin, senior partner and managing director at The Boston Consulting Group (BCG) explains, "They were just looking at where in China they would put it, as opposed to where in the world they would put it." Cheap labor, more favorable local regulations and tax incentives are just some of the reasons that companies moved operations or set up anew not only in China, but in other parts of Asia and South America as well. Times have definitely changed, however, and the US has, in some respects, become both a viable and sensible location for technology manufacturing. Some outfits have made it work before, of course, whether that's because it's made sense for their business, or because they pride themselves on being "Made in America."
Companies are now investing in US facilities for a host of reasons, but unsurprisingly, numbers play a large part. "Wages in China have been rising by 15 or 20 percent per year since 2000," notes Sirkin, who leads reshoring (the return of business operations to US soil) research at BCG. Shipping costs are also a factor. It stands to reason: the farther a product has to travel from where it's made to where it's sold, the bigger the transport bill. There's also a price to pay that can't be measured, but can be summarized using the old cliche "time is money." Consumer technology evolves rapidly. In the smartphone world, for example, no sooner has one flagship device launched, than another hits the market to supersede it, whether that's due to a faster processor, a higher-resolution screen or a cutting-edge design. It's the reason handset makers end up cannibalizing their own products yearly. Even with higher-value products like computers, which have a comparatively long lifespan, new processor architectures and other hardware upgrades make what came before them less-attractive purchases.
Every week that a gadget sits in a container crossing the Pacific is a week of competitive edge lost.
"Technology is, in essence, a perishable good," as Sirkin puts it. Every week that a gadget sits in a container crossing the Pacific is a week of competitive edge lost. Fresh hardware is desirable hardware, and in the consumer technology business, speed of delivery is paramount. While it's hard to put a number next to a dollar sign and quantify the impact of shipping limbo, it's no less of a factor for companies making manufacturing decisions. Combined with rising production costs overseas, "the logistics become more important in the equation," says Sirkin. We've reached a point where, economically speaking, it's become practical for some companies to build in the US and take advantage of a shorter supply chain from the factory to end users.
Despite hailing from China, Lenovo is one of the most prominent tech companies of late to expand operations in the US. It added in-house manufacturing capabilities to its distribution center in North Carolina and started PC production in January. In June, its "grand opening" signaled that the facility had hit full working capacity, with production lines singing and 115 employees tending to them. As Jay Parker, president of Lenovo North America tells us, building computers in the US is part of the company's "global-local philosophy." With the Lenovo brand growing in the US, so too must investment in all parts of the business, and "manufacturing was really the next step." Although Parker admits labor rates are higher in the US compared with emerging markets, "that gap has closed over the years." Numbers out of China's National Bureau of Statistics show that manufacturing wages have risen by 71 percent since 2008. Chinese labor costs haven't increased enough to match the US yet, but it still made sense for Lenovo to begin assembling in the US, given the logistical savings and those all-important "competitive advantages."
A shorter delivery time is one of those advantages, Parker states, but he also cites being able to customize orders "later in the purchase cycle," whether that be hardware-based, or other services like etching names / logos onto products. That a computer is made in the US presents other business opportunities, as well. "We have customers that either desire 'assembled in the US' products, or in some cases, require it," Parker adds, with the latter group a reference to various government sectors.
Motorola's SVP of Supply Chain and Operations, Mark Randall, expressed similar motivations regarding his company's move to manufacture its Moto X flagship at a former Nokia plant in Texas. Again, the speed of delivery to American consumers was one of the drivers for Motorola. Interestingly, Randall was part of the Nokia team that originally set up the manufacturing base in Texas.
Any time you have an international boundary between you and your consumer, there's risk," Randall says.
"Any time you have an international boundary between you and your consumer, there's risk," Randall says. "So, being able to ship product from our Texas facility and get it to our carrier partners, or even direct to our consumers, we believe is an efficient way of doing it."
In addition, Randall mentioned product development is much easier when manufacturing is a local effort, saying, "Good things happen when you get the engineers and the ops guys working together." It means product iterations are accelerated, and being closer to customers in general improves the company's ability to judge demand and react to changing needs.
Manufacturing hardware in the US brings with it some clear benefits, and these can now be realized as the cost calculations make for a good business case. Companies do, of course, get the added bonus of having a "Made in America" product, a title that's appealing to the US consumer when it pops up so infrequently. Whether that's one of the drivers of the manufacturing trend is inconclusive. Sirkin argues it's favorable, but not an agent of change, remarking, "They may get an image advantage because they are doing it, but I think they are making decisions based on the economics and what's right for their business." In Lenovo's case, we heard that it does afford the company more opportunities, and as Parker mentions, "we'll certainly communicate that wherever it's appropriate."
Motorola's Randall was clear in stating, "There was no PR strategy in this decision." But he adds that Google backed Motorola's plan to build the Moto X in the US, and that the team is excited to be doing it in America and challenging the norm.
Workers on the assembly line at Foxconn's factory in Shenzhen, China (STR/AFP/GettyImages).
Ricardo Hausmann, professor of economics at the Harvard Kennedy School, thinks PR has played a part in companies deciding to assemble products in the US. He makes an interesting point about Apple's connection with Foxconn and the negative press both have received over labor practices at the latter company's Chinese factories. A Fair Labor Association report in 2012 led to an agreement from Apple and Foxconn to adhere to legal codes governing the amount of time employees should work, as well addressing labor conditions at the factories and on-site dormitories. The report found some employees worked excessive amounts of overtime for questionable compensation, and some worked upwards of seven days straight without time off. Injuries and suicides at the plants have also damaged Apple's and Foxconn's reputations.
China's been consistently lowering its rare-earth export quotas, which somewhat restricts the movement of manufacturing elsewhere. Coupled with issues of protecting and enforcing intellectual property rights, among other problems, Hausmann says Apple's decision to build the Mac Pro in the US is "also a message to the Chinese that if they play hardball, there are options." The American-made Mac was something Apple CEO Tim Cook was keen to draw attention to during his appearance at a Senate subcommittee hearing in May that looked at tax practices of multinational corporations, amid accusations of Apple's tax avoidance. In an effort to dispel the perception that the company is deliberately keeping cash outside the US, he mentioned the $100 million investment being made to build a Mac on American soil. Chad Moutray, chief economist at the National Association of Manufacturers (NAM), believes that with regard to image, "in many of these cases it looks good. There's certainly a lot of Americans who want us to make more in the US."
They may not have the global presence of Apple, Lenovo or Motorola, but there are a lot of companies in the US that manufacture computers here on a small scale. Formed in 2000, Puget Systems began building high-performance workstations, servers and consumer PCs for enthusiasts, with a specific focus on near-silent computers. For Founder and President Jon Bach, keeping everything in-house is essential to Puget's "quality first, price second" model. Accountability is a big factor, with manufacturing, sales and support all under the same roof to benefit patrons. "The customer just wants something that we know intimately well," says Bach.
"There's way too many opportunities for corners to be cut when you're not in direct control," Bach says.
That's not to say Puget didn't consider manufacturing elsewhere. "When you can buy a $200 chassis [in the US] for $35 [in China], yeah, you look very strongly at that," remarks Bach. Ultimately, having tasked a factory in China to make a chassis, the quality didn't meet Puget's standards despite several rounds of prototyping. "There's way too many opportunities for corners to be cut when you're not in direct control," Bach says.
As a niche vendor, outsourcing wasn't viable due to the volume of imports required. The necessity of bulk orders sourced from China means it's harder to react to changes in consumer demand. With the rapidly evolving PC market, Bach says, "We have to keep that development cycle short."
Lotus Computer, a company formed in 2007 by Karel Felipe (founder and executive manager), is another US PC manufacturer building mid-range to higher-end rigs for a broader target market. For Felipe, manufacturing in the US wasn't the result of any cost-benefit analysis, but an ideological choice.
"Building everything here in the US is one of those things I really wanted to focus on, and I've been fortunate that we've been able to do that," Felipe says.
At one point, an investor approached Felipe suggesting he grow the company by moving assembly to China. "I said no ... and of course that never happened. So that's one of my prouder moments," Felipe tells us. "As a result, we're smaller than we could be, but I'm much happier that way."
Felipe feels it's important to source as many components in the US as possible, and work with American companies wherever possible. It's good for business too, he says, adding that being made in America is something that drives Lotus' computer sales. Consumers respond to his efforts, and he believes it's a competitive advantage. "People just want to buy domestic. It makes us feel good. It makes us feel like we're supporting our own country," Felipe says.
Lenovo's new Whitsett, N.C., plant
As small companies have been making it work, so too, are large ones, and if other companies find similar value in moving manufacturing to the US in order to better serve local residents, then it would make sense for the trend to continue. Moutray imagines leaner processes and the reduced labor cost difference between America and emerging markets will see the US become more competitive in the future. "The long-term prognosis for manufacturing is very bullish," he says. Sirkin also suggests that the plays of Apple, Lenovo and Motorola will cause others to assess whether they are manufacturing in the right places. A survey conducted by BCG in 2012 reported that 37 percent of 106 US manufacturers with over $1 billion in sales polled were considering moving at least some production from China to the US. Of the companies with revenues of $10 billion or more, that figure increased to 48 percent.
When asked whether the trend will continue, Parker candidly answers, "I hope not, because we believe it's an advantage for us right now." However, he follows up by saying, "To the extent that we're a pioneer in bringing technology manufacturing back to the US ... I hope that the trend continues." Parker also highlighted the value in bringing other parts of Lenovo's business to the US. The PC maker finished moving its customer support center for web and telesales from Bangalore, India, to North Carolina in mid-May, which resulted in a 25 percent increase in satisfaction ratings, Parker tells us. This is something the smaller PC companies that manufacture in the US were vocal about -- keeping everything local to improve overall "customer experience."
Not everyone is convinced US manufacturing is making a comeback, mainly due to the lack of hard numbers to support the notion.
Motorola's Randall agrees that we'll see more companies follow suit and establish manufacturing bases in the US. As an aside to more favorable labor rates, he says simply that outfits "wanna be in the markets where they sell their products." Randall is also of the camp that believes as more companies move back, a local supply chain for components will develop. Several companies like Intel, Corning and Samsung already have some manufacturing plants in the US, but these components are often exported for the assembly phase.
It's unlikely we'll ever see a complex technology product for the mass market that's truly "Made in America" -- the correct term is "assembled," as the vast number of components that are required to make a computer or similarly intricate hardware are sourced from all over the world, in most cases. Sirkin notes that because of this, manufacturing a product in any one country, the US or otherwise, is difficult.
One opinion holds that increased component manufacturing is a natural progression. Device manufacturers begin moving back to the US, which creates a greater need for locally sourced components to further reduce logistical costs for all involved. Others suggest the component supply chain is too global, and that won't change. Parker doesn't believe that worldwide component sourcing will change over time, and notes logistical costs have more of an impact on whole products than components. Hausmann also doesn't foresee a "reversal of globalization of the supply chain."
Not everyone is convinced US manufacturing is making a comeback, mainly due to the lack of hard numbers to support the notion. Talking to The Atlantic, Alan Tonelson of the US Business and Industry Council said, "Virtually no national- or global-level data show that American manufacturing is even continuing its recovery from recession, much less stealing the march on Chinese and other foreign rivals." (He was speaking on US manufacturing in general, rather than commenting on the technology sector specifically.)
If companies increase investment in the US, there's also a chance China could do something to react. The Washington Post cites various experts that claim the Chinese government could address the shrinking labor cost gap through subsidies and other policies. Scott Paul, president of the Alliance for American Manufacturing, is quoted as saying, "I don't think you want to underestimate the willingness of China to protect its manufacturing."
It's too early to say definitively that companies will rush to install or reshore manufacturing bases in the US. There seem to be benefits in doing it, but there are also challenges. Obviously, companies need the spare cash to invest in facilities in the US to begin with. Beyond that, Moutray mentions that for many manufacturers, US regulations, strict environmental and labor standards, as well as tax and tort laws can be a burden.
It's too early to say definitively that companies will rush to install or reshore manufacturing bases in the US.
Motorola's Randall anticipates "managing the second-tier suppliers when they're not localized" to be a challenge, and also found an issue with hiring skilled labor for the plant in Texas. Flextronics, the company managing the Moto X plant, has had to bring experts in from overseas to fill those gaps. In agreement with Randall's experience, a 2011 report commissioned by The Manufacturing Institute found 83 percent of the 1,100 US manufacturing companies polled thought there were moderate or severe shortages in the availability of skilled production labor. Furthermore, nearly 75 percent said shortages were having an impact on their ability to produce and grow.
Randall doesn't expect a rapid resolution of the skills gap, and added that partnerships with educational institutions will be necessary to nurture local talent moving forward. The Obama administration also sees collaboration with businesses and communities as important for growing a skilled manufacturing labor pool. Tax reform, tax relief, easier access to loans and other financial incentives are also ways in which the president is attempting to drive growth in US manufacturing.
Lenovo admits that getting any new facility operational is a challenge, although ramping up production in North Carolina went smoothly. In contrast to Motorola's problems finding the right people, Parker says, "We were able to hire very high-quality talent very quickly. Much quicker than we thought we were going to be able to."
Whatever the challenges may be, more favorable economic factors, the pace of the industry and the perceived value of being near consumers has led some companies to bring manufacturing back to the US. If they are realizing the benefits, others may well end up following suit, or could face losing out if they don't. The Nexus Q wasn't exactly a poster child for US manufacturing, as it shows that being made in America doesn't necessarily equal a better product. However, the competitive advantages expected from either expanding to the US or reshoring could aid the consumer. Smaller companies have said they've experienced this already by being able to react faster to changes in demand, ship devices quicker, accelerate product development and ultimately, better understand their target market. Larger outfits cite some of these as reasons for investing in US manufacturing also. Therefore, if the trend continues, we might not only see the US as a whole prospering from local manufacturing, but also see quicker access to better products as a result.