Stung by Soaring Transport Costs, Factories Bring Jobs Home Again

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The Wall Street Journal         

June 13, 2008

Stung by Soaring Transport Costs,

Factories Bring Jobs Home Again

By TIMOTHY AEPPEL

June 13, 2008; 

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 $5,600.

HOMEWARD BOUND

•  The News: Soaring fuel prices are prompting some U.S. companies to

bring overseas production back closer to home.

•  The Background: Higher oil prices are part of a larger wave of

inflation hitting manufacturers in low-cost countries as wages rise

and regulations tighten.

•  What's Next: Don't look for U.S. factory jobs to soar, but the

bleeding could slow. Mexico may be the biggest beneficiary.

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.

[Chart]

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.

[Problem]

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 products.

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.

[Transport]

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 countries.

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 Illinois.

"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.

-- Conor Dougherty

contributed to this article.

Write to Timothy Aeppel at timothy...@wsj.com1

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