US: Manufacturing at home

With investments in equipment, US manufacturers are newly competitive

By Amy Barrett

Quality problems forced Tanis to abandon production in China. TIM EVANS

Scott Tanis took the plunge and outsourced some of his manufacturing to Asia--and lived to regret it. Six years ago Tanis, owner of 55-person Tanis Inc., a Delafield (Wis.) maker of industrial brushes, decided he couldn't pass up the money he'd save shifting some work to China. Using a broker, he found a plant there to make his labor-intensive twisted-bristle brushes. But within two years, customers of the $9 million company began complaining about quality. Between the language barrier and the time difference, Tanis had trouble fixing things. "Once the problems surfaced it became a big drain on my time," Tanis says. "It was a mistake."

For many, that experience is all too familiar. For every business owner that successfully manufactures abroad, there are others who encounter major headaches. With wages rising in places such as China, and with a spike in freight costs earlier this year, the huge benefit to manufacturing overseas narrowed. The yuan's rise against the dollar further eroded Chinese manufacturers' edge, encouraging some entrepreneurs to bring production back to the U.S. or even to Mexico. "A lot of companies that outsourced [manufacturing] found that by the time it was all done, the unit cost ended up being too high," says Hannah Kain, chief executive of ALOM Technologies, a contract manufacturer and distributor in Fremont, Calif.

In fact, U.S. manufacturers have regained some critical ground. In 2008 the cost to manufacture in the U.S. was only 17.6% higher than the average in nine other industrial countries, including Canada, Mexico, and China, according to the Manufacturing Institute and the Manufacturers Alliance/MAPI. That's down from 31.7% in 2006. The reasons: a slowdown in health-care cost hikes in the U.S. and continued investments in productivity-enhancing technologies. Plus, the labor expense required to produce one dollar of goods in China popped to 20 cents in 2008 from 13 cents in 2006, while U.S. costs held steady at about 48 cents. "We see companies either curtailing expansion plans overseas or bringing some of the production back to the U.S.," says Tim Hanley, vice-chairman at consulting firm Deloitte.

For Vancouver (Wash.)-based KIC Holdings, a 20-person, $40 million maker of wheel parts for trucks and buses, offshore contract manufacturers were the norm for more than a decade. But in mid-2008, as iron ore prices rose in China, Chief Executive Greg Hatton found that producing some items in the U.S.--those bound for the eastern part of the country--made more sense, so he signed with a Rockford (Ill.) manufacturer. He has a few suggestions to others following in his shoes: Get potential contractors' recent sales and cash-flow numbers to ensure that they are sound; choose a manufacturer that's diversified, rather than dependent on your business; and make sure any contract lets you jump ship for a better deal if your manufacturer can't match it. "Any decision may need to be revisited given today's environment," says Hatton.

For Scott Tanis, new technology was the key to making U.S. manufacturing work. In June 2008, he spent about $500,000 on three machines that allow him to produce stapled and twisted brushes. While it would still be cheaper to produce in China, he says the quality snafus and wasted time would wipe out any savings. Now he relies on Chinese suppliers for just a few things, including artists' brushes. "This whole mentality of rushing off to find cheap labor has backfired," says Tanis. And while he doesn't rule out using Chinese manufacturers more heavily again, Tanis says he'd approach it very differently next time. "I'd make multiple trips to China," he says. "I'd be a lot more careful."

For a related slide show, go to businessweek.com/go/sb/outsourcing

For a related video, go to businessweek.com/go/sb/videos

Barrett is a senior correspondent for BusinessWeek SmallBiz.