China and the Rightshoring Movement

In the Hutong
Monday Morning with Chinese Characteristics
1112 hrs.

Back in February I posted an article here (“The Beginning of the End of Outsourcing“) declaring that the thirty-year trend that had shifted jobs and manufacturing to developing countries had hit its apogee. I focused on the Apple-Foxconn relationship, but the point was not about either company. Rather, it was that this powerful partnership, one that has defined the limits of what is possible with contract manufacturing in a developing economy, was also quietly drawing the high-water mark of the offshoring/outsourcing trend. The pendulum was starting to swing back toward corporate control of manufacturing as a core competency and a return to manufacturing close to markets, rather than at the end of a trans-Pacific supply chain.

Entrepreneurs, Stay Home

Proving once again the value of a subscription to The Atlantic, James Fallows and Charles Fishman deliver a pair of superb features in the December issue that offer some more anecdotal examples to suggest that we may be witnessing the beginning of a tectonic movement in manufacturing. Fallows surveys Foxconn and finds its working conditions much improved but sees in those improvements the subtle signs that China’s traditional comparative advantages are in decline.

He then talks to a group of manufacturing entrepreneurs in San Francisco (of all places) who explain that global supply chains are simply not nimble enough to support many businesses. Offering the example of DODOcase, the guys making some of the most stylish smartphone and tablet cases anywhere, Fallows quotes co-founder Patrick Buckley as saying “To figure out all the things we needed to do, and design the product, and launch, and fulfill orders within one month—that meant that outsourcing to China was not ever a feasible option.”

One month. That’s the speed of business. The founders were quoted nine months from design to fulfillment to work with China. Would it have been cheaper? Maybe. Would it have lost them huge opportunities? Absolutely. Would it have exposed them to early knockoffs, possibly by their own contract manufacturer? Hell yes. And Fallows apparently spoke to several companies in the same predicament as DODOcase.

Made in Louisville

Interesting indeed, but a couple of guys in a loft making semi-custom luggage is a very different animal than a Fortune 500 company.

This is where Fishman steps in, telling the story of the revival of GE’s Appliance Park in Louisville, Kentucky. Five years ago the place was the definition of rust belt, a facility built for six production lines and 16,000 workers that had lost nearly everything to China. Things were so bad that GE tried to sell the division, but nobody would buy. As it turns out, that was a good thing. Today there are four production lines making high-end appliances and components for GE products that used to be made in either China or Mexico. One in particular, the high-tech, low-energy GeoSpring home water heater, became a corporate revelation.

So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.

GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.

Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.

As it turns out, the factory floor is a core competency. What is more, some things can actually be made better and cheaper in America by U.S. labor, especially if those products are destined for markets nearby. Harry Moser, an MIT-trained engineer quoted in Fishman’s article estimates that as much as a quarter of what is made offshore for the US market could be made more cheaply in the US than overseas. After reading Paul Midler’s excellent Poorly Made in China and going back over my notebooks from my own four years as a factory inspector for a U.S. furniture importer, I am betting that not only is Moser onto something, he may actually be underestimating. The GE case proves something that I and Midler have long suspected – that too many companies have outsourced their production to China because they lack the imagination or intelligence to do anything else.

Whose Factory?

We can’t get carried away here, though. The idea that China is reaching the end of its stint as the world’s factory floor is getting tired, and it is too tempting to see in a few examples a trend of factories re-opening across America. Not only would believing either meme be unrealistic, it would miss what is actually going on. We are witnessing the beginning of two trends, rightsourcing and rightshoring.

Rightsourcing, as its name implies, is the science of deciding whether to make something or buy it. That decision used to be such a simple one that the “build or buy” formula was taught in first year managerial accounting. What we have discovered in the past two decades is that there is more to the decision than just the math, that there are attendant risks and variables that make the formula far more complex. Is somebody going to steal my designs and formulas and sell them to my competition? Can I really trust somebody else to help me avoid quality or labor issues that could hurt my business? Am I pouring away a hidden competitive advantage by getting out of manufacturing?

Rightshoring, by contrast, is the science of deciding where to make something. We used to think that making things in a country where people worked for less money would be cheaper. But that difference is dissipating, and more questions arise. How much is it costing me to keep a transpacific pipeline full? What are the opportunity costs involved in a six- to nine-month product development process? What are the hidden risks in making something six thousand miles away from the customer? And what happens if there is an uprising or the price of oil goes up 5o%?

We are going to hear a lot more about these trends in the coming months, but it is important to emphasize that this does not mean the end of manufacturing in China, or anything close to it. These trends do point to a future where manufacturing begins to seep back into the world’s great companies, and where products are made closer to where they will be consumed. China will still make a lot of stuff, but it will make less stuff for Europe and America and more stuff for China and the rest of Asia.

At the same time, Chinese companies will set up factories closer to their customers. Think Haier in North Carolina, Lenovo in Europe and Brazil, and Great Wall Motors just about anywhere it sells cars. China will remain a hub of manufacturing as long as consumers in China and the rest of Asia are buying products. But the percentage of goods in the American or European shopping baskets that will be marked “Made in China” looks set to decline over time.

I’ll examine what this means for several specific industries in later posts. In the meantime, it would do many of us a lot of good to start reading up on manufacturing and operations management.


About David Wolf

An adviser to corporations and organizations on strategy, communications, and public affairs, David Wolf has been working and living in Beijing since 1995, and now divides his time between China and California. He also serves as a policy and industry analyst focused on innovative and creative industries, a futurist, and an amateur historian.
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2 Responses to China and the Rightshoring Movement

  1. This is exactly why my printing operations are in Hong Kong, unlike most manufacturing operations here that are located in the Pearl River Delta region. I feel vindicated because of your article. Thank you.

  2. Felipe Albertao says:

    You mentioned Lenovo in Brazil, and that’s for me the bigger story — I. e.: How China is “stepping-up” with rightshore. Ten years ago it would be unimaginable (even laughable) to have a Chinese company producing computers in Brazil for the Brazilian market. This was something exclusive for American, European or Japanese companies (HP, GM, Sony, etc…). Today it’s not only Lenovo, it’s JAC Motors, Chery, Foxconn (Apple), Hisense, Haier… all producing for the local Latin American market.

    It came out today that Tim Cook is planning to bring back some production to the US [1]. I suspect this will follow the same model that Apple adopted here in Brazil, where they partially invested on a local Foxconn factory to produce specific Apple products to fulfill local demand and take advantage of some tax incentives.

    In other words: An American company offshoring to a company in China that rightshores to… America!


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