The Insourcing Boom
Comment of the Day

January 11 2013

Commentary by Eoin Treacy

The Insourcing Boom

Thanks to a subscriber for this fascinating article by Charles Fishman for the Atlantic, focusing on GE's repatriation of some manufacturing jobs to the USA. Here is a section
Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.

Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

American unions are changing their priorities. Appliance Park's union was so fractious in the '70s and '80s that the place was known as “Strike
City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can't save much money chasing wages anymore.

So much has changed that GE executives came to believe the GeoSpring could be made profitably at Appliance Park without increasing the price of the water heater. “First we said, ‘Let's just bring it back here and build the exact same thing,'?” says Kevin Nolan, the vice president of technology for GE Appliances.

But a problem soon became apparent. GE hadn't made a water heater in the United States in decades. In all the recent years the company had been tucking water heaters into American garages and basements, it had lost track of how to actually make them.

The GeoSpring in particular, Nolan says, has “a lot of copper tubing in the top.” Assembly-line workers “have to route the tubes, and they have to braze them—weld them—to seal the joints. How that tubing is designed really affects how hard or easy it is to solder the joints. And how hard or easy it is to do the soldering affects the quality, of course. And the quality of those welds is literally the quality of the hot-water heater.” Although the GeoSpring had been conceived, designed, marketed, and managed from Louisville, it was made in China, and, Nolan says, “We really had zero communications into the assembly line there.”

Eoin Treacy's view As the pace of technological innovation increases, robotics become a more integral part of the manufacturing process, the USA's competitive advantage in energy persists and labour becomes more pliable, there is scope for more manufacturing jobs to return to the USA. As these factors force a more nuanced approach to factory location we will find out exactly what can and cannot be manufactured domestically.

The global landscape for manufacturing is likely to continue to become more competitive, particularly as China becomes less competitive in low cost manufacturing. The march of technology versus the allure of low manual labour, energy, transport costs and taxation will force some tough decisions for companies with global ambitions. What has become increasingly evident is that despite having been on the side lines of investor interest for much of the last couple of years, industrial manufacturers turned to a position of outperformance over the summer.

In the USA, General Electric found support near $20 last week and a sustained move below that level would be required to question medium-term scope for additional upside. Illinois Tool Works consolidated in the region of its 2008 peak from September and at least partially unwound its overbought condition relative to the 200-day MA. A sustained move below $60 would be required to begin to question medium-term upside potential. Honeywell continues to extend its breakout to new all-time highs. Eaton Corp is somewhat overbought as it tests its 2011 peak near $56.50. However, a sustained move below the MA, currently near $48 would be required to check medium-term potential for additional upside. Ingersoll-Rand continues to hold its progression of higher reaction lows as its tests the 2011 highs near the psychological $50. Parker Hannifin is testing the upper side of its range near $90. Flowserve is somewhat overbought in the short-term following its surge to new all-time highs but a clear downward dynamic would be required to check momentum beyond a brief pause.

In Europe, Siemens is temporarily overextended relative to its 200-day MA, but a sustained move below it, currently near €76.70, would be required to check medium-term scope for additional upside. Rolls Royce continues to hold its progression of higher reaction lows and a sustained move below 850p would be required to question medium-term upside potential.

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