Why GE Is Betting $800 Million On Manufacturing In America

The cover of this month’s Atlantic proclaims Comeback: Why the future of industry is in America. It features two articles (The Insourcing Boom and Mr. China Comes to America) on how companies are “insourcing,” moving production back from other parts of the globe (primarily China) to the States.

They make some interesting points. The Insourcing Boom focuses on General Electric’s decision decision to repatriate a significant amount of its appliance manufacturing to Louisville, Kentucky.

Before you dismiss this as a bit of window dressing to provide some political cover, you should know that Jeff Immelt and company are dropping $800 million to make this happen. I’m sure Mr. Immelt likes political cover and good press as much as the next CEO, but he didn’t get to be head of GE by spending nearly a billion dollars on a whim. They really believe that they can make this work.

The article points out several factors that have come to favour producing in the US.

At Appliance Park, this model of production—designed at home, produced abroad—had been standard for years. For the GeoSpring [water heater], it seemed both a victory and a vulnerability. The GeoSpring is an innovative product in a mature category—and offshore production, from the start, appeared to provide substantial cost savings. But making it in China also meant risking that it might be knocked off. And so in 2009, even as they were rolling it out, the folks at Appliance Park were doing the maths on bringing it home.

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 per cent 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 per cent 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. labour productivity has continued its long march upward, meaning that labour 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.

That’s a compelling list but all in one or another come around to saying that the US is cheaper (or China is more expensive) than you would have thought. But the article also makes the case that there are further benefits. 

Let’s start with responding to market demand.

Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs.

Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.

This speed has several benefits. First, reducing pipeline inventory from over a month to under a day frees up a pile of cash as working capital is no longer sitting in containers on the Pacific. Second, it makes planning easier.

Adjusting to the pace of the housing recovery (or lack thereof) is a lot easier when production volume coming into the warehouse can be adjusted in a matter of days as opposed to a matter of months. Finally, this should allow greater flexibility in modifying product design as engineering changes can move right into the supply chain.

The article also emphasises the benefits of interaction between design, engineering, and manufacturing.

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.” …

The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it.

The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 per cent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.

In the end, says Nolan, not one part was the same.

So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labour required to make it went down. The quality went up. Even the energy efficiency went up.

GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 per cent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.

The importance of considering manufacturing in product design is not, of course, a new topic. It was a recurring theme in a lot of work done on product design in the late 80s into the 90s. (This book is a personal favourite.) But this is a pretty compelling example. Arguably, a lot of tricky, labour-intensive welding isn’t per se a problem (at least in terms of cost) if labour is sufficiently cheap. As a snapshot, that makes sense. However, simplifying the process of making the water heater opens up a number of options (as well as improves quality). GE can now consider making the GeoSpring in far more places than it could previously.

This intertwine between design manufacturing and speed is not just for large multinationals. Indeed, there may be as many or more opportunities for smaller firms. That point is made in the Mr. China article.

The medium-tech start-ups of SFMade (and its counterparts) are working out a strategy that combines quick response, local skills, and a global marketplace to foster manufacturing in U.S. cities.

Liam Casey’s new investments in the Bay Area are designed to apply a similar model for companies several steps up the technology ladder. The purchase of Lime Lab and the opening of what he sees as an academy of high-speed manufacturing in the city could combine to bring to U.S.-based entrepreneurs, inventors, designers, and smaller companies some of the advantages now unique to Apple and a handful of other globally integrated firms—and with a greater probability than Apple’s of creating jobs in the United States.

The heart of those advantages is, again, connecting the sequential stages of the manufacturing cycle as a whole. The process naturally starts with the idea for a product. Whether the idea is practical depends crucially on how it is realised in industrial design; whether that design makes for an efficient or impractical factory experience depends on how well it is matched to process-engineering on the shop floor. Even after production begins, the design is often refined and the manufacturing process rejiggered based on real-world experience.

The closer this linkage, the faster and more efficiently an idea can be converted to tangible, marketable reality. The more evolved and responsive the feedback loop, the more precisely an organisation will be able to distinguish promising projects from impractical ones.

Apple has this capacity; it has teams on more or less permanent assignment to southern China to match its designers’ goals to the realities of the shop floor. But for the first time in decades, new tools are making it possible to develop this capacity for U.S. manufacturing. This means greater prospects for American innovators to convert their ideas into products—and jobs. That is what’s new, and promising. As one entrepreneur told me, asking not to be named for fear of irritating the mighty Apple, “What Apple has, internally, will now be available to smaller companies.”

That is an interesting prospect. It, however, begs the question of what happens as firms grow. GE is designing a product and its corresponding process for high-volume operations. This vision for start ups is built around flexibility and evolving technologies like 3D printing. All of that is great. But it will remain a side show (particularly in terms of employment) unless it is able to scale efficiently into something bigger.

This post originally appeared at The Operations Room

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