Positive Developments Improve The Business Case For Returning Manufacturing To The United States By Pat Togni

by King & Spalding

Encouraging reports regarding what could become an intensifying renewal of manufacturing in the United States are beginning to emerge after decades of decline. This development suggests a strong business case for substantial growth of domestic manufacturing, with higher profits, lower prices for consumers, and improved efficiencies throughout the production process. The reports also offer a refreshing level of candor regarding the effects of outsourcing felt by at least some U.S. manufacturers over the years.

A recent article by Charles Fishman in The Atlantic entitled “The Insourcing Boom” tells the story of the resuscitation of General Electric’s Appliance Park, in Louisville, Kentucky. Once the home of GE’s appliance division, Appliance Park was on the auction block as recently as 2008, with many buildings across the large campus idled. Now, the company is investing $800 million to spur an ongoing renaissance of GE’s domestic appliance manufacturing operations there, which are reported to account for 55 percent of GE’s $5 billion appliance revenues today. As a result, GE forecasts that 75 percent of its appliance revenues will be generated by domestically produced goods by 2014.

GE officials cited the high degree of teamwork that is possible when stakeholders from across the spectrum of idea-to-production-to-market are able to work in the same location. Importantly, GE officials also identified the absence of similar communication in its legacy outsourcing operations in China.

In particular, GE’s new domestic production strategy has sparked collaboration between engineers, line workers, and sales personnel to create efficiencies in the production process that translate into reduced materials and labor costs. These savings ensure growing profits while passing lower prices on to the consumer. For example, refinements to the domestic design and manufacturing process of the GeoSpring water heater translated into a five-fold reduction in labor hours as compared to China. Streamlined logistics and reduced transportation costs offer additional benefits to domestic manufacturers.

In addition to the direct financial benefits, returning to domestic production also addresses several hidden costs faced by U.S. companies when manufacturing abroad. In particular, the Fishman article details an over-emphasis on foreign labor costs that may have not fully appreciated “the corrosion of quality and decline of innovation.” These concerns are magnified as labor rates, particularly in China, are increasing at a much faster pace than in the United States. At a more fundamental level, this renewed focus on domestic production is better equipped to deal with what Fishman calls “the newfound impatience of the product lifecycle itself.” Products change more rapidly than ever before, and the United States offers advantages for maximizing the use of proprietary technology and a more skilled workforce.

Another critical factor relates to the monetization and protection of a company’s intellectual property through domestic manufacturing. In the words of Fishman, “Your factory is really a laboratory - and the R&D that can happen there, if you pay attention, is worth a lot more to the bottom line than the cost savings of cheap labor in someone else’s factory.”

GE is no outlier in returning manufacturing operations to the United States. Other press reports indicate that products ranging from Wham-O Frisbees to Apple Mac computers are (or soon will be) manufactured domestically after foreign sojourns. While some commentators suggest that at least some portion of this development is attributable to PR or political expediency, there is evidence that the business case for such a shift is compelling and growing. Moreover, external events such as the ongoing complications between U.S. and Chinese regulators regarding access to corporate audit documents may constitute further justification for a fresh look at the pros and cons of bringing manufacturing jobs back to the United States.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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