- The Washington Times - Monday, July 28, 2008

In the wake of a decades-long manufacturing exodus overseas, the climbing cost of outsourcing has some U.S. companies looking homeward.

The gap between the cost to produce goods in the United States or to produce them abroad has narrowed, thanks to a decrease in China’s competitive advantage.

The Chinese yuan has appreciated 18 percent against the dollar in the past three years, making exports more expensive and less competitive. Chinese wages have more than doubled over the past five years, and the Chinese government has lowered or eliminated tax breaks on exports.

Meanwhile, oil prices have soared from $25 a barrel in 2002 to more than $125 today, discouraging American businesses from shipping manufacturing operations overseas.

“The days are over where you just think you can go over to China to get something cheap,” said Harry Kazazian, chief executive officer of Exxel Outdoors Inc., a Haleyville, Ala., producer of outdoor recreational gear.

Exxel has been doing just that since 2005, when executives detected the beginnings of a market shift favoring homemade wares.

“It’s kind of like the light bulb goes off in your head,” Mr. Kazazian said.

“We really need to come back,” he told Exxel President Armen Kouleyan while they toured their production plants in China.

Colleagues raised their eyebrows at the plan, but Exxel soon began investing in its Haleyville, Ala., factory in preparation for a move back to the United States. The company increased the American portion of production of its best-selling family sleeping bag from 40 percent to more than 60 percent, said Mr. Kazazian. He plans to increase that to 90 percent by 2010. The company will produce 1.5 million sleeping bags this year and expects to make 2 million next year.

“We’re kind of on the front end of the trend,” Mr. Kazazian said, explaining that by maintaining its U.S. factory when other companies closed their domestic plants, Exxel avoided huge startup costs and delays when it decided to repatriate production. “We wanted to keep our options open. Whether you call it hindsight or you call it good fortune, I think that is why we’re ahead of the curve.”

No hard data are available to document the shift back to U.S. factories, said NAM Chief Economist David Huether. But a second-quarter NAM survey of 314 member companies showed that 59 percent of respondents have seen “increased costs of materials and supplies imported from abroad” and 30 percent are purchasing more supplies from domestic sources.

Mr. Kazazian said he thinks outsourcing has peaked.

Factory owners might wait and watch price trends before shifting to domestic manufacturing on a large scale, said Hank Cox, vice president of communications for the National Association of Manufacturers.

“For them to turn around and say, ‘Oops, mistake,’ that takes a lot of money to bring production back here,” he said. “It’s not just something you can do at the drop of a hat. These factors would have to continue for a while before you would see a tipping point.”

Still, economic forces make it more attractive for an increasing number of manufacturers to move toward more domestic production, Mr. Cox said. Although factories won’t gear up overnight, the sustained increases in oil prices - and shipping costs - are bringing the change closer.

Firestone Home Products, a Burnsville, Minn., maker of high-end outdoor furniture and gas grills, has decided to return 25 percent of its total manufacturing to U.S. plants from China.

China and India produce about 75 percent of Firestone’s goods today.

“There’s been steady cost increases over the last three years, and all of them have been double-digit-type increases,” said Firestone founder and President Dan Shimek, who invented Heat-N-Glo fireplaces with his brother Ron before starting Firestone in 2004. He anticipates upping American production by October.

“Our interest would be to position in the United States to begin with, so when it gets so that it’s not that much more expensive to make it here, it becomes more attractive. I would like to think that this can be done on a permanent basis,” Mr. Shimek said.

U.S. production costs are increasing along with China’s. The NAM study said 79 percent of manufacturers report increased costs for domestically produced goods. But for some businesses, reducing costs by cutting overseas shipments sweetens the incentive to manufacture in the United States.

A producer of classroom furniture for schoolchildren, Artco-Bell Corp. of Temple, Texas, has transferred production of steel and polypropylene goods from foreign to domestic sources. Although that has meant an increase in unit costs, eliminating transoceanic shipping has reduced total expenses by as much as 20 percent, said Stephen Sykes, vice president of marketing.

Over the past eight years, he said, the cost to ship a container from China increased from $2,200 to more than $7,000.

“For a while, [the Chinese] were buying steel better than we could buy steel,” Mr. Sykes said. “But as the scales began to balance as far as what they were purchasing in raw and what we were purchasing in raw, then the freight became the issue. The great equalizer is the boat ride back over.”

Increased wages in China have produced a new middle class, Mr. Sykes said. If Chinese wage gains remain high, he said, his company’s shift to domestic production could become a long-term change.

“I don’t know how it’s going to slip the other way,” he said.

U.S. labor costs are still higher than Chinese, but other factors help make U.S. production more tempting, said Mr. Kazazian.

“You’re never going to have $2-an-hour labor” in the United States, he said. “But with quality, time, efficiency, you close the gap.”

Mr. Sykes said he is happy that his company has reduced foreign outsourcing from 12 percent to less than 4 percent of total output in the past year and a half.

“Not only does it make it feasible, but it sure makes us feel a heck of a lot better to do business in the United States,” he said.

Mr. Kazazian said domestic manufacturing helps his company keep customers satisfied while encouraging patriotic pride.

“Given the opportunity, American workers are better than anyplace else,” he said. “The pride that they have when they come in and produce a product is something missing in a lot of other places. Because at the end of the day, there’s a lot of advantages to being made in the USA.”

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