FloridaTrend.com, the Website for Florida Business

Not Made in China

I-Con Systems, a Seminole County company that makes plumbing control systems for correctional institutions, had been manufacturing its components in China for about a decade when CEO Shawn Bush began thinking about moving manufacturing operations back to Florida.

Like most manufacturers, Bush says he was originally lured to China by lower labor costs, but had encountered a number of problems in dealing with his overseas manufacturer, including the language barrier, a lack of consistent quality and a time lag in receiving material.

A critical moment came when all three problems occurred at the same time with a key vendor. “We had a large shipment that was delayed by a vendor, and when it was received, it did not pass our quality control,” says Bush, who was unable to communicate with the vendor to explain the issue and get it corrected in a timely fashion.

After scrambling to save the customer and the project, Bush decided that the offshore relationship was not working and began acquiring equipment, personnel and the skills to bring the key items in-house to his factory in Oviedo in Seminole County.

“We began moving manufacturing about two years ago and now do 90% of our manufacturing in-house,” says Bush, who has hired 15 additional workers and purchased more than $300,000 in equipment to aid his growing manufacturing operation.

Over the past 10 years, manufacturing has grown from 4.9% of the state’s GDP in 2002 to a high of 5.7% in 2007 to 5.3% last year.

The “reshoring” trend has picked up pace across the U.S. as labor costs in China, India and other countries have begun to rise. While American wages have flatlined over the past several years, wages for the typical Chinese factory worker have increased almost sixfold over the past decade, from 62 cents an hour in 2003 to about $3.50 an hour today.

High Concentration
Counties where manufacturing jobs are at least 6% of total employment.

County % of Jobs in Manufacturing
Taylor 22.2%
Dixie 16.4
Brevard 11.0
Putnam 10.4
Wakulla 10.3
Madison 10.2
Manatee 8.4
Pinellas 8.0
Gadsden 7.8
Polk 7.5
Columbia 7.4
Marion 7.3
Levy 6.5
Nassau 6.4
Source: Florida Department of Economic Opportunity, Bureau of Labor Market Statistics, Quarterly Census of Employment and Wages, in cooperation with the U.S. Department of Labor, Bureau of Labor Statistics. Data from 2012.

*Data not available for Hamilton, Liberty, Suwannee, Union and Washington counties.

Although that’s still dramatically lower than the average hourly wage of around $19.30 for a U.S. factory worker, the higher productivity of American workers means China’s labor-cost advantage drops to about about 55%. In addition to wage inflation, a higher rate of employee turnover, a sharp rise in China’s currency and intellectual property theft are also driving up manufacturing costs in China, along with the costs associated with difficulties like those Bush encountered. The natural gas boom, meanwhile, has dramatically reduced energy costs for U.S.-based factories.

As the manufacturing cost difference between the U.S. and China shrinks, it often makes better sense to bring production closer to market, says Dave Sievers, a principal at the Hackett Group, a Miami-based consulting firm that advises manufacturers on offshoring and reshoring.

Sievers also says that companies that manufacture closer to home can be more responsive to customers who need finely tailored specifications or customized changes to the products they’ve ordered. “It tends to be better to have the production closer to the market,” he says, “so it’s easier to provide those value-added services, so you can be more responsive.”

When U.S. Block Windows, an acrylic block window manufacturer in Pensacola, bought out Hy-Lite in 2009, Hy-Lite was outsourcing most of its injection molding to China. Roger Murphy, president of Hy-Lite/U.S. Block Windows, says steep shipping and warehousing costs and logistical headaches convinced the company to bring that work back.

The Tipping Point
Research from the Hackett Group shows that companies begin to consider outsourcing when the cost of manufacturing overseas appears to be 20% less than making goods in the U.S. But companies that have outsourced jobs will consider moving them back when that cost gap narrows to 16%. The consulting firm predicts that the “total landed cost gap” with China will reach 16% some time this year.

Because of long lead times in China, Hy-Lite had to keep large inventories in stock to cover potential orders. Carrying that much excess inventory, Murphy says, is a “high-risk proposition” because it’s nearly impossible to anticipate which colors, designs and models customers may want.

Coming Home
A 2012 survey by the MIT Forum for Supply Chain Innovation revealed that about a third of U.S. manufacturing companies are considering bringing jobs back to the U.S. Among their top main reasons for reshoring:

Time-to-Market 73.7%
Cost Reductions 63.9%
Product Quality 62.2%
More Control 56.8%
Hidden Supply Chain Management Costs 51.4%
Protect Intellectual Property 48.5%

By moving production in-house, Murphy says, Hy-Lite avoided keeping several hundred thousand dollars’ worth of inventory on hand, saved on warehousing costs and reduced the risk associated with carrying goods that go unsold. Reshoring also enabled the company to provide better service to his customers. Another added benefit for manufacturers is the good will engendered among customer by the “Made in the U.S.A.” label. “It certainly doesn’t hurt,” says Murphy.

While it’s unclear precisely how many manufacturing jobs have shifted back to the Sunshine State, Florida Trend was able to count about 1,500 reshored jobs at a dozen companies.

That trend, however, appears unlikely to make more than a dent in 80,000 factory jobs that disappeared in Florida between November 2007 and November 2010. As of July, manufacturing employment in Florida stood at around 315,000 — a 2% rebound from its low point in 2010, but still far short of 390,000 manufacturing jobs the state boasted in 2007. The sector makes up 5.3% of the state GDP.

In addition, companies that bring jobs back from overseas tend to couple the move with capital expenditures to increase automation — meaning that when a business reshores, 300 jobs in China don’t translate into 300 jobs in the U.S. The more labor-intensive a manufacturing operation is, the more likely it is to stay overseas, company owners say.

Biggest Manufacturers in Florida

Company Revenue (billions)
Jabil Circuit (St. Petersburg) $17.2
Harris (Melbourne) 5.5
Watsco (Coconut Grove) 3.4
B/E Aerospace (Wellington) 3.1
Roper Industries (Sarasota) 3.0
Tupperware Brands (Orlando) 2.6
Cott (Tampa) 2.3
Arthrex (Naples) 1.3
Elizabeth Arden (Miramar) 1.2
Vector Group (Miami) 1.1

“The cost of sophisticated machinery, automated machinery has come down. The advances in technology in every sector in this world now are moving at a mind-boggling speed,” says Eric Higgs, CEO of LumaStream. The St. Petersburg company has been developing and manufacturing its products in Canada and Taiwan but is now consolidating its operations in St. Petersburg and is partnering with St. Petersburg College to provide hands-on manufacturing training and help create a labor pool for about 1,000 jobs the company expects to create over the next five years.

“You can have one person that’s running two or three machines,” says Higgs, “instead of one person for each machine.”

Even so, the Boston Consulting Group estimates that the reshoring trend will directly and indirectly create 2 million to 3 million jobs in the U.S. over the next decade, reducing unemployment as much as 1.5 to 2 percentage points and lowering the non-oil-related merchandise deficit by 25% to 30%. The consulting firm calls its predictions conservative.