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OM in the News: Offshoring and Reshoring Reach a Balance for U.S.

May 15, 2014
Generac has reshored manufacturing of a key alternator component

Generac has reshored manufacturing of a key alternator component

In 2001, Generac Power Systems joined the wave of American companies shifting production to China. The move wiped out 400 jobs in Wisconsin, but few could argue with management’s logic: Chinese companies were offering to make a key component for $100 per unit less than the cost of producing it in the U.S. Now, however, Generac has brought manufacturing of that component back to its Whitewater plant. The move is part of a sea change in American manufacturing, reports the Los Angeles Times (May 13,2014): After three decades of an exodus of production to China and other low-wage countries, companies have sharply curtailed moves abroad. Some, like Generac, have begun to return manufacturing to U.S. shores. The tipping point came when Generac had enough sales to justify investing millions of dollars in new equipment for the Whitewater plant. The company can now produce an alternator with 1 worker in the time it took 4 workers in China.

Harry Moser, of Chicago’s Reshoring Institute, tracks the inflow of jobs and estimates that last year marked the first time since the offshoring trend began that factory jobs returning to the U.S. matched the number lost, at about 40,000 each. “Offshoring and ‘re-shoring’ were roughly in balance — I call that victory,” said Moser.

Several factors lie behind the change:  (1) Over the last decade, Chinese labor and transportation costs have jumped while U.S. wages have stagnated; (2) Manufacturing also has become more automated, further reducing labor’s weight in the cost equation; (3) The boom in natural gas production in the U.S., largely driven by fracking, has led to a 25% decrease in gas prices in the U.S., contrasted with a 138% increase in China; and (4) the rise of online commerce has made local control of supply chains more important, especially because many U.S. manufacturers report growing problems with quality control of goods made in China.

Classroom discussion questions:

1. Why are more U.S. firms reshoring?

2. Why did Generac reshore this component?

 

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