[Marxism] New cost pressures on relocation of production overseas

Marvin Gandall marvgandall at videotron.ca
Sun Jun 15 04:09:33 MDT 2008

Stung by Soaring Transport Costs,
Factories Bring Jobs Home Again
Wall Street Journal
June 13, 2008; Page A1

The rising cost of shipping everything from industrial-pump parts to
lawn-mower batteries to living-room sofas is forcing some manufacturers to
bring production back to North America and freeze plans to send even more
work overseas.

"My cost of getting a shipping container here from China just keeps going
up -- and I don't see any end in sight," says Claude Hayes, president of the
retail heating division at DESA LLC. He says that cost has jumped about 15%,
to about $5,300, since January and is set to increase again next month to

The privately held company, known for making the heaters that warm football
players on the sidelines, recently moved most of its production back to
Bowling Green, Ky., from China. Mr. Hayes says the company was lucky to have
held onto its manufacturing machinery. "What looked like an albatross a year
and a half ago," he says, "today looks like a pretty good asset."

The movement of factories to low-cost countries further and further away has
been a bittersweet three-decade-long story for the U.S. economy, knocking
workers out of good-paying manufacturing jobs even as it drove down the
price of goods for consumers. But, after exploding over the past 10 years,
that march has been slowing.

The cost of shipping a standard, 40-foot container from Asia to the East
Coast has already tripled since 2000 and will double again as oil prices
head toward $200 a barrel, says Jeff Rubin, chief economist at CIBC World
Markets in Toronto. He estimates transportation costs are now the equivalent
of a 9% tariff on goods coming into U.S. ports, compared with the equivalent
of only 3% when oil was selling for $20 a barrel in 2000.

"In a world of triple-digit oil prices, distance costs money," Mr. Rubin
wrote in a recent report. He figures that for every 10% increase in the
distance of a trip, energy costs rise 4.5%.

Transportation costs are just part of a larger wave of inflation sweeping
global manufacturing, which has also been pounded by higher costs for basic
materials, such as steel and resins.

The cost of doing business in China in particular has grown steadily as
workers there demand higher wages and the government enforces tougher
environmental and other controls. China's currency has also appreciated
against the dollar -- though not as much as some critics contend it
should -- increasing the cost of its products in the U.S.

Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient
Overseas Container Lines in San Ramon, Calif., a major shipping line, says
he's heard from customers who are moving production back to the U.S.,
including a maker of steel pans for car engines.

"I believe a decent amount of production could come back into the States
within five years, not everything," he says. "But it won't be because of
transport costs -- it'll be because other production costs have gone up and
companies have realized they can have better control over their production
when it's closer to home."

For many manufacturers, though, oil prices that have hurtled past $130 a
barrel have been the tipping point.

Emerson, the St. Louis-based maker of electrical equipment, recently shifted
some production of items such as appliance motors from Asia to Mexico and
the U.S., in part to offset rising transportation costs by being closer to
customers in North America.

Edward Monser, the company's chief operating officer, says logistics costs,
which include all the expenses associated with moving goods, became a worry
about a year ago.

"That's when it became a dominant part of the discussion," he says, adding
that oil then was less than $100 a barrel. "So with oil now at $130, it's
even more serious." Mr. Monser says Emerson's larger strategy is to
regionalize manufacturing, producing as much as possible within the part of
the world where its sold.

But moving production closer to markets won't avoid all the problems
associated with rising transportation costs. Manufacturers face hefty
surcharges on domestic shipments by truck and train. And already congested
domestic transportation systems may have difficulty handling a sudden
upswing in demand from manufacturers buying and moving more raw materials
and other supplies over U.S. rails and highways.

Moreover, in certain industries the advantages derived from offshore
production continue to trump higher transportation costs.

Electronics firms, for instance, are now clustered in Asia and gain a major
benefit of proximity to one another.

While many manufacturers are re-evaluating production strategies, there are
limits to how many jobs will flow back to the U.S. One problem is that much
of the basic infrastructure needed to support many industries -- such as
suppliers who specialize in producing parts or repairing machines -- has
dwindled or disappeared.

U.S. job losses in manufacturing have averaged 41,000 a month so far this
year -- nearly double the pace last year, with sectors such as autos and
construction materials tied to the housing slump especially hard hit. In
essence, every job added as a result of companies pulling work back home is
being more than offset by others reeling from the domestic slump.

Higher fuel costs "may slow the outsourcing of goods in the future, rather
than causing a massive shift back of those things that have already been
outsourced," says Daniel Meckstroth, an economist at the Manufacturers
Alliance/MAPI, a public policy group in Arlington, Va.

A prime example is Craftmaster Furniture in Taylorsville, N.C. The company,
bought two years ago by a Chinese manufacturer, once intended to shift 40%
of its U.S. production to China by the end of this year or early next year.
With the planned move only about half done, that exodus has stopped cold.

"We're getting hit with increases up and down the system," says Roy Kalcain,
the company's president. "It's changing our whole equation for where we
produce." As recently as a year ago, Mr. Kalcain says he was saving 15% when
he assembled sofas in North Carolina using kits of fabric that were pre-cut
in China. Those savings are now only 7% or 8%.

When savings fall to far less than 15%, it gets harder to justify having the
work done in distant Chinese factories that take 12 weeks to deliver

The higher costs are particularly problematic for lower-value goods: The
cheaper a product, the more significant transportation costs are in the
final price. That may help explain why Chinese exports of such
"freight-sensitive" goods to the U.S. are now falling for the first time in
more than a decade, according to CIBC's Mr. Rubin.

Bremen Castings Inc., a family-owned foundry in Bremen, Ind., is seeing a
wave of customers bringing work back from China and other low-cost

Last month, a pump manufacturer, which had moved more than $1 million worth
of metal-casting work from Bremen to China two years ago, called "to
reactivate everything," says J.B. Brown, the foundry's president. "They told
me the cost of transport from overseas was the straw that broke the camel's
back -- and they said they didn't see it going back down any time soon."

And the heavier and bulkier goods are, the more sensitive they are to fuel
costs. CIBC's Mr. Rubin predicts Mexico will be "the biggest winner of all"
as increased transportation costs make China uncompetitive in an
ever-growing list of businesses in North America. Even Mexico may be too far
for some companies.

Last fall, Crown Battery Manufacturing Co. decided to close a plant it
bought in Reynosa, Mexico, and move the jobs to its Ohio home base, adding
25 workers to the 400 it already employed.

"We're shipping batteries, which are big and heavy," says Hal Hawk, the
company's chief executive.

Mr. Hawk estimates shipping to customers, who tend to be clustered in the
Midwest, was adding 5% to 10% to the cost of the Mexican-made batteries,
which he says also suffered from quality-control problems. The smallest
batteries are 20-pounders for lawnmowers, but they also make 29,000-pound
giants for running underground mining machines in places like southern

"They were traveling 2,000 miles to get to those major customers," says Mr.
Hawk, and all indications are that fuel surcharges on the trucks would just
keep growing.

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