The Insourcing Boom
theatlantic.com
theatlantic.com
American manufacturing will return. It may not be the job engine it once was, but it is still a wealth engine. American energy prospects are suddenly looking up, leading the world in both the tech to extract it and, this time, the resources to extract. We are only at the beginning of tearing down our scelerotic educational systems, but there is a good opportunity to build a truly 21st century education system over the next decade or two. We remain a high-tech economy. And we've got some wild cards up our sleeve, like a budding space industry and advanced medical research, to say nothing of whatever industry will come out of nowhere in the next ten to fifteen years that I'm not even thinking of to become huge.
I celebrate anybody who succeeds, and I don't particularly care if America is or remains "exceptional". I want everyone to succeed. I'm just saying that I think there's good reason to believe that for all the challenges in the world that America still has a very good chance to be in the set of successful countries in the medium term (5-25 years).
It never left. The US manufacturing output steadily increased from the 50's to the recent recession. Right now, it is at an all time high. The idea of american manufacturing being shipped overseas is just false, and I'm sick of people repeating it.
What happened is that as wages got expensive, US labor was replaced by machines where possible, and by some cheap process steps overseas where not possible. Intel CPUs are a good example: They used to be made wholly in the US, employing a lot of blue-collar workers. To save costs, the factories were automated to the point where the only process steps left that employ a lot of people without advanced degrees are packaging and testing. And then those were shipped to Malaysia and Costa Rica. The high-capital process steps that create most of the value in the system are still in Oregon, Arizona and New Mexico.
Manufacturing jobs, as they used to be, are gone. Not because of globalization, but because of robots. And the old kind of manufacturing jobs will never return -- it just doesn't make sense to pay people $30 a hour for what could be done faster, cheaper and better by a robot.
A buddy of mine made a mint working as a welder building fabs in Phoenix when they were leaving California in search of cheaper water and lower regulations. He was very worried about the toxic emissions and very lax (non existent) oversight.
The article is suggesting that jobs that can support a family are coming back, but with the described poverty-level $13.50 wages for skilled line workers that's obviously not the case. We're not talking high school dropouts either: among the tasks given to the production workers is redesigning from scratch products which use impractical and inefficient designs, at least according to the scenario explained in the article. The article also points out that these are lines where there are not many workers per line.
My own thoughts about the market were piqued by the description of the chosen product. Here we have an electric heat pump heater that costs over $1300. This is right at a time when running an electric heater, even an exceptionally efficient one, has become a poor choice given the price of gas. Furthermore, gas is very likely to remain cheaper than electric for many years. Not to mention that gas heaters are simply more efficient for heating to begin with. Rather than buy an $1600 chinese or $1300 american water heater, one can buy a $150 mexican factory built water heater that runs on gas and will save many thousands of dollars in energy costs over its lifetime. That's the rational choice, it is unlikely this complicated electric one is going to be something with a lot of market growth. Hopefully there are better examples of high growth reasonably priced mass market items that can be built as well, which have a chance at creating more than a handful of these $13.50 jobs (comparable to the salary at CostCo or McDonalds, BTW).
For water heating one could also do what I did - use $50 worth of materials and junk to build your own solar water heater that reduces the cost of water heating to almost nothing. (http://www.motherearthnews.com/renewable-energy/1979-09-01/A...)
In December 2011 there was a similar article in the NY Times[0], which addressed the expansion of manufacturing jobs but had a much bigger focus on wages.
Unfortunately for those workers, wages won't go up until the US economy continues to improve and unemployment goes down. Until then that "just thankful to have a job" feeling will suppress labor wages in general. Last quarter, corporate profits reached a historic high even as wages reached their lowest-ever share of GDP[1].
Maybe I'm just raw from the hostile election season, but this has always been personally frustrating to me. Our private sector doesn't pay enough for the jobs it offers, yet any suggestion to have the government assist is considered "redistribution" or "socialism."
[0] http://www.nytimes.com/2011/12/30/business/us-manufacturing-...
[1] http://money.cnn.com/2012/12/03/news/economy/record-corporat...
Wages are not depressed. Per-worker wages have increased in both the public and private sector:
http://research.stlouisfed.org/fred2/graph/?g=duS
Sum[wages] / GDP is down because employers are finding ways of getting more output with fewer employees. I.e., Sum[wages] = (average wages) x (# of workers) is down because # of workers has decreased, not because wages have.
If wages had decreased, we would not have had a recession at all (according to Keynesian economics).
A couple of points: 1. $13.50 * 2080 is $28,080, which is clearly not rockin' Prada but, in places with low costs-of-living, is very livable. Silicon Vally and places where HNers are likely to congregate are much more expensive, in large part due to housing restrictions (http://www.slate.com/articles/business/moneybox/2012/05/face...).
2. $13.50 is where workers start, not necessarily where they end.
3. I'm obviously not arguing that workers are making a LOT of money or that they're likely to get rich, but they're also not poverty-level in most of America and are still much higher than minimum wage and much better than nothing.
But the point isn't whether $28k is livable in Nebraska, but how it compares to what people used to get back in the day.
And when Obamacare kicks in, my healthcare life will still be fundamentally managed by insurance companies, with somewhat changed regulation around the margins but still extremely profitable.
I'm sorry but we can't constantly let the price of medicine / medical care drag down the world's economy as a whole.
"We've got this medecine that shall raise your life expectancy by one year if you have a cancer and it cost $20 000, let's offer everyone this".
"We've got this medecine that shall raise your life expectancy by two year if you have a cancer and it cost $100 000, let's offer everyone this".
"We've got this medecine that shall raise your life expectancy by three year if you have a cancer and it cost $100 000 000, let's offer everyone this".
"We've got this medecine that shall raise your life expectancy by four year if you have a cancer and it cost $100 000 000 000 000 000, let's offer everyone this".
Where do you put a limit of what's acceptable?
In the end it all comes down to death tables and one day politicians and everyday people will understand that.
If 99 persons can live decently with $28 K and the hundredth one can't pay the $8 K ambulance, so be it.
Because, in the end, it all comes down to death tables and we can't allow totally overpriced and unjustified crazy high medical (and related) cost, like a $8 K ambulance trip, ruin down the entire world's economy.
Also it would be nice if these arbitrarily high medical price ween't constantly used as a form of intellectual terrorism justifying more and more debt creation.
All I have to say is I'm happy to live in Canada and don't worry about these things.
On average, we pay roughly 30-40% Income Tax. The less you make, the less you are taxed. If you make less than $38,000 in my province, you would pay something like 24% (15% federal tax + 9% provincial tax - http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html). And if you make more you get taxed more, but it's reasonable.
Honestly, when you grow up here, you just get used to it. It comes off the paycheck just like retirement savings and employment insurance, and you don't think about it.
I'm a proud Canadian, equal healthcare for everyone is a value we share and I think it's worth paying for.
It's about returns to worker productivity. As the article mentions, factory workers are hundreds of times more productive than they were in the 1960s. They are probably thousands of times more productive than they were in the 1760s.
How much has worker productivity increased in, say, symphonic music? In the last 300 years, I would guess it has perhaps doubled, if that (amplification) And yet symphonic concerts still happen, despite costs increasing without bound!
Medical costs rise because new services are available, but worker productivity rises slowly. Medicine may be a larger and larger fraction of the economy, but as long as worker productivity rises in OTHER fields, we will still be able to afford it.
This yields an after-tax net of $1,750 per month. You can rent a 2 BR apartment in Louisville for $450 per month. The $1,300 left over is enough to live quite comfortably in Louisville--heck I don't spend much more than that in New York City (the difference is I pay $1,500/month on a studio).
... but it makes me a little sad that the median family household in this model requires both parents to be out of the house for 40 hours per week plus lunch hour plus commute. I mean, I think the Ward&June Cleaver myth was a little silly, and I don't think it's an Inalienable Right that every single family should be able to afford indefinitely supporting 4 people on one income.... but it seems like it would be better for society if kids got more parental energy than I can imagine them getting in this circumstance.
I mean, I'm not complaining about my job (ha, not at all), but I note that I'm barely a functional spouse when I get home after work, much less able to be a great father (not that I have kids). And even if I was, I'm not getting home until 7 or 8. Suppose my wife had the same schedule, what kind of (hypothetical) parents would we be?
I'm not saying it's Wrong or Unjust. I'm just saying it seems a little sad.
As for what kind of parents you'd be not getting home till 7-8... parents like my wife and I? The baby isn't old enough yet to really recognize either of us as anything more than a milk source, but when she gets older that will be her reality. I honestly don't think it's a big deal--my dad never got home till 8 each night, and traveled extensively and work the whole weekend, etc, and my brother and I have a great relationship with him. A lot of the "putting in face time" when it comes to kids is more for the parents than for the kids. Kids are perfectly happy playing with their friends at school/having the nanny take them around so long as they know that you're there and see you everyday.
You're bringing in 1750 a month, but 500 of that is going to student loans. 450 goes to rent. 200 for heating in the winter. Add in the rest of your utilities, and you're looking at 1300 a month. Do you have a car? 300 a month. Do you want to eat? You can probably get by on 150 for food.
But you have no health insurance. You have no savings. You cannot start a family because you can't support a family.
And, unless you get very lucky, this is going to be your situation until your loans are paid off. You will be 35 when your adult life can actually start.
But if you're unlucky - if you get sick, if you need to take care of your family, if nearly anything bad happens, regardless of how minor, you're probably completely and utterly fucked to an extent that a lot of people can't possibly realize.
>Not to mention that gas heaters are simply more efficient for heating to begin with.
Are you sure about that? A heat pump with a COP of, say, 2 is 300% efficient (it is said to have an Energy Factor, EF, of 3). That is, for every Joule of electrical energy supplied to the pump, 3 Joules are added to the water tank. On the other hand, the combustion products of a natural gas heater need to be exhausted outside the building. Unless they are first cooled to the temperature outside, the heater is less than 100% efficient.
Where I live, a Joule from the electric company costs about 2.5 to 3 times as much as a Joule from the gas company. A quick Google search indicates that this type of water heater typically has an EF of 2 to 2.5. The cheapest gas heater I could find on the Home Depot website was over $300 (twice your Mexican one) with an EF of 0.62. So it wouldn't surprise me if the energy cost of an electric is on par with the energy cost of a gas heater, and it would surprise me if the electric actually used more energy. I don't see how you would save thousands of dollars in energy with a gas heater: Even in the worst case (a 2 EF electric heat pump vs. a 0.62 EF gas in a location with a 3x energy cost ratio), the gas only just breaks even.
In case this wasn't obvious before, let me state this very clearly: Over 30% of the energy content of the natural gas used by your water heater goes up the chimney and is not used to heat the water. Gas water heaters and furnaces are NOT 100% efficient.
[1] Wikipedia claims that conventional external combustion (i.e., steam) power plants have a thermal efficiency of 33%.
[2] Wikipedia claims that transmission and distribution losses nationally averaged 6-7% in recent years.
Combination Boilers that provide both hot water for heating and hot tap water are advancing quickly. Flexible PEX tubing these cut out a ton of traditional cutting and brazing plumbing labor to install hot water loops. It's also a lot more efficient to move hot water to a heat exchanger of some form in each room than to push air through ductwork. Some of these rigs also can be easily combined with a solar thermal roof array, further cutting your gas or electric costs.
I'm pretty excited about the last option, since I have an older house with poor air return paths, which means my furnace is almost always ingesting chilly basement air rather than getting a nice recirculation of heating air that's already been heated. Not to mention radient heat exchangers are silent and allow easy individual room temperature control with the smarter thermostat systems.
If I turn the heat on in all the rooms, I can watch the electric meter spin.
Not this is a _reflective_ layer, not just insulation. The thermodynamics of radiant heat systems involve photon transmission, not just gas convection. If it was installed by a general contractor they may not have understood this distinction and the need for aluminum couplers and metalized reflective insulation.
Mechanical design work of appliances is not something that you'd do alongside shift work. The workers getting paid $13.50 an hour are not going to be mech-eng degree holding designers.
When I was in school, I used to buy a new bag every year because they would just tear and fall apart within 12 months. Eventually, getting tired of this, I went online looking for a good bag. I found out about Tom Bihn[0]. Both their management and their production is done in Seattle. The prices are steep, but I decided to take a chance on them, given the good reviews on various sites.
I've now had that same Tom Bihn bag for five years, and it looks exactly like it did the day I got it - not a single tear. I don't think you could say that about any bags produced at an overseas sweatshop.
Fast forward a few years, and I picked up one of their bags at a Mountain Equipment Co-op (not quite a chain store, like REI in the States). This bag also wasn't cheap, but when I checked the label it was made entirely in China. The quality is not bad, but I haven't had a chance to abuse it for a few years. I was mostly disappointed that they seem to promote the pro-American rhetoric while the majority of their channel goods seem to be produced abroad.
I'm impressed with those Tom Bihn bags, because they seem to be uncompromisingly made in America. I'm going to keep them in mind when I need a new bag.
Price-minimized, zero-margin, off-the-shelf crap for big box stores are a different story. Then they can trade on their brand equity built with embroidered logo bags and sell trash to the mass market.
- turn-around for custom goods from China is not 6-weeks. It took a solid 2 weeks to get the bag, which is what I would expect. The cost to ship expedited versus the labour cost is a wash, especially considering they stil had to post the bag to me anyways.
- The goods in-store are still marketed as premium goods; to use an HN appropriate analogy, this is like me telling you that your Mac is crap because you bought from a 3rd party retailer. For reference, this was $150 for a laptop messenger bag. Not a ton of money, but not cheap considering there's no leather, etc involved.
- If you look at the store I mentioned, they're not really big-box. They're in some awkward in-between yuppie place where everything is greenwashed. I still shop there, but I'm pretty disenchanted since this incident.
- This event has, in my mind, destroyed whatever brand recognition they had. The product is alright, but I'd rather support a company that does everything in NA.
The point being, the market're selling into would be more than willing to absorb the cost of local production. I suspect at a point during their growth they were unable to afford to scale up locally, and decided to contract volume manufacturing for the channel. Now that they're well established, I would hope that they would perform an exercise like the one in this article, and see if moving production back makes sense.
(This is actually mentioned in the article)
My point was, the cost of shipping by air versus hiring an American worker is probably a wash. I suspect they do their custom work in SF because it's a token gesture. Sort of local-washing, versus green-washing.
I don't think it matters where a product is built. It's the design and build quality that makes the product a good value. Initial cost was high but made up by not having to buy another bag, not having to deal with a torn bag, and not having to buy another bag makes it worth it.
Was GE originally known for manufacturing (or ability to manufacture) and then lost that core ability? If they did, what would their core ability be after outsourcing, management of manufacturing? Maybe I'm not making a good connection there, but I think it could be.
On a lighter note, maybe this will reintroduce some needed humility to American culture. It's easy to forget that each item we touch, everything we use, was put together by another human's hands. Soldering together the proto shield for my Arduino deeply touched me, reminding me that every resistor and LED and processor in my laptop was soldered in by another human.
I may be romanticizing it, or maybe I'm just getting old, but I'm starting to appreciate objects crafted by humans more than those generated by machines.
Your electronics from before the 80s (and often the 90s) was soldered by a human though.
I am capable of assembly with 402 and 603, but I can't even begin to imagine that going well on an assembly line.
(805 is somewhere around the size of small rice, 402 is half that size)
Also, I forgot to mention most processors are BGA packages AFAIK, so impossible to actually solder manually.
http://www.ge.com/pdf/investors/events/10192012/ge_webcast_p...
They conveniently split their balance sheet between GE Capital and GE (industrial/manufacturing). Roughly 70% revenue and profit from non-financial (mainly manufacturing - from 747 engines, to trains, to energy, to MRI machines, etc), ~30% from GE Capital.
So yeah, always have been and still very much a manufacturing company.
As a more general answer to your question, in case you missed it, there was a good article and discussion a while back on companies losing manufacturing through outsourcing, and its consequences:
http://www.forbes.com/sites/stevedenning/2011/08/17/why-amaz...
http://news.ycombinator.com/item?id=2907187
TLDR: “So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”
An interesting counterexample that demonstrates the point is Intel - they've maintained their manufacturing capability, and as a result lead the world in lithography and process technology, a competitive advantage that allowed them to compete with AMD in the mid-to-late 2000s even when AMD's chip designs were better, and to dominate AMD now that both Intel's process technology and chip designs are better.
Andy Grove has apparently dedicated his retirement to advocating for reshoring manufacturing for the deep competitive advantage it confers [1].
Ref:
"Loophole Helps GE Benefit From Bank Rescue Program" (article from 2009) http://www.washingtonpost.com/wp-dyn/content/article/2009/06...
Warren Buffet did a $3 billion "private bailout" in October, 2008 http://www.bloomberg.com/news/2012-09-14/buffett-ge-bet-pays...
I'm a little surprised they didn't mention advances in automation / robotics that make cost of labor even less of a reason to offshore. The U.S. manufacturing sector produces more than it ever has, despite the fact that manufacturing jobs are down from 19.4 million jobs in 1979 to 11.5 million jobs in 2010. http://archive.mises.org/17964/u-s-manufacturing-output/
We've been through this before. In 1870 US agricultural employment was around 75% of the whole workforce (~29 million people). Nowadays it is closer to 2% (~3 million people). We produce orders of magnitude more food with considerably fewer people.
Our economic system isn't really setup to work well in a situation where supply of labor drastically exceeds the demand for it.
Obviously some of the difference will be soaked up by new professions that didn't exist before. For example here is a list of jobs that didn't exist 10 years ago http://finance.yahoo.com/news/10-jobs-didn-t-exist-175608243...
I am convinced that prosperity is being driven by trade and specialisation as put forward by Matt Ridley http://www.ted.com/talks/matt_ridley_when_ideas_have_sex.htm...
Specialisation is a form of skill and so the issue is really what happens to unskilled labour. Everyone "knows" that education is a fix, but current education systems are extremely broken and closely modelled on the dawn of the industrial age https://www.youtube.com/watch?v=zDZFcDGpL4U
It will be interesting to see if the cost of living goes down since that will also greatly alleviate things. Increased automation should result in that.
There isn't any reason to suppose that demand for engineers and managers will ever come anywhere close to 100% of the working population.
Meanwhile, the advantage of theft, violent crime and the black market improves dramatically as wages decline to nothing.
Incorrect because if productivity were increased to the extent where labor costs were no longer a part of the equation, then humanity would not cease to exist as this claim implies (i.e. no jobs begets no money begets no food begets mass starvation begets extinction).
Dangerous because this line of thinking drives protectionism (i.e. unions, trade barriers and tariffs, subsidies) which increases the cost of goods which provably does lead to homelessness and starvation. This is not to say that tariffs and such are intrinsically bad because there are other factors involved (e.g. national security), or that increases are not eventually offset by corresponding decreases as competitors enter the (free? maybe...) market. Nonetheless, people suffer until the eventually happens.
I wonder to what extent insourcing represents surrender for US firms seeking access to the Chinese market. China's leaders don't seem keen on idea of letting foreign firms sell in China longer than it takes for Chinese firms to pick up knowledge. The licensed production of Russian Sukhoi-27 warplanes comes to mind - the Chinese agreed to pay for 200, assembled from kits with Russian assistance. After 100 had been built, the Chinese said "no more" - and started advertising an indigenous copy for international sale. [1] http://en.wikipedia.org/wiki/Shenyang_J-11#J-11
I would really love to see the manufacturing world return to the mantra of, "this needs to be designed and built to last as long as possible", it won't happen but it would be nice to live in a world again where the best components and design decisions are made with the consumer in mind, not lining the pockets of CEO's. Once upon a time companies created products that lasted forever, I've seen televisions from the 50's with original picture tubes and components still working.
It's good to hear General Electric (a company I am not overly fond of) have started manufacturing products back in the United States again. Companies like GE returning jobs and manufacturing back home are the only hope this economy has.
sure, to this day you can find old stuff that is still working perfectly. but what you don't see is all the other stuff that has been discarded, thrown away, replaced. survivor bias at its best.
right now products need to adhere to safety standards, energy efficiency standards and have green certificates. if something breaks and just puts a minor scratch into you major lawsuits are going off.
in the past, you simply died in an accident (whoops, sorry about the electrocution or yes, our cars sometimes go up in flames).
Having both these modules in close (spatial and temporal) proximity helps minimizing efforts spent in irrelevant problems. The general rule holds for most softwares with 'manufacturing' replaced by user appreciation.
The hidden cost of taking manufacturing offshore is that a GREAT deal of industrial knowledge is lost. How do you know a problem needs to be taken into consideration if... you don't even know what the problem is?
The glorious days of Bell Labs seems like heaven for tinkerers. Designing, implementing and manufacturing camps don't alienate but simply part of one living organism.
http://www.freep.com/article/20121202/NEWS01/120823062/The-P...
The thing that China CAN'T overcome at least in the short term is both the cost of shipping and the amount of time shipping takes. As the article mentions, a shipment of product can take up to 6 weeks whereas products produced in the US can be shipped within hours of completing production. There's just not any reasonable way for offshore production companies to overcome this issue that I can see in the short term and that could drive the onshoring movement aggressively, especially with the constantly increasing costs of fuel.
For bigger companies though with more stable product lines I think this is much less of an issue. Bringing manufacturing back is working for GE for more complex and expensive products. I am not sure you will see then bringing back the basic models of appliances though.
The best part was, everyone was involved in the whole 'stack'. The engineering group I worked with handled QA, but also travelled downstairs regularly to help with manufacturing procedures. We watched assemblers and proposed design changes to make their jobs easier. The process created a virtuous cycle where the initial person laying out the board knew what kind of headers would be hard to connect in which enclosure (for example), and as a result the quality was very high while being competitive on cost.
I think an assembly process like that would have helped, for example, with the teething problems experienced by the Jawbone Up.
For example, during the day, i'd get requirements hand it out to the leads. If the lead is at PK, then guess what, i'm getting up at 3am to talk to them. Sending emails wont cut it. He then has to translate to a different language and hands it out to his devs. Thats several degrees of separation between the analyst and the dev. I've always believed that what was accomplished could have taken half that team if they were all local.
I think software development insourcing is ripe for this in the U.S. There is a large cost of living divide between NY, SF and Missoula, MT and the mid lvl salaries i've seen here would go a LOT further in those parts of the country and the time zone and language issues are minimal.
--part of *
It's more important to be a process developer and a technologist to operate the machinery and design the assembly process than it is to actually turn a wrench.
I can only imagine 3d printing and accelerating product cycles will increase this effect. Dev ops in the real world - the designers and the manufacturers become the same people and the result is 'autonomation' to use the toyota term.
At a large corporation I worked at a few years ago, there was an ongoing push to offshore jobs to an internal group in the same company. We were encouraged to use this group by our chain of command despite the fact that previous efforts at outsourcing in our own group had failed disastrously. So it would be good to see the public discourse swing back toward the benefits of insourcing so that managers have more ammunition to fight for what works.
The only way is constant innovation and engineering , but if people don't go for STEM education , only lowly paid assembly job and sales job would be left here