Made in the USA, Sort Of: The Hard Truth of Rebuilding Manufacturing Capability

There was a time when a 'Made in the USA' label had to meet so-called domestic content requirements. Clinton era Secretary of Labor Robert Reich used to joke that after his hip replacement he no longer met that standard for cabinet secretaries.

But the pressures of global competition loosened whatever definitions or  requirements remained and they were soon rendered irrelevant by the wholesale offshoring of the US manufacturing base as corporate leaders responded to the demands of a financialized economy and impatient shareholders.

So here we are a decade or two down that long lonesome road and suddenly the benefits of domestic production are starting to look better. Wages in Asia are rising while quality can be uncertain. Energy prices have affected the cost of transportation. And in a flash of insight that must have Henry Ford chortling from the beyond, US and European corporations are suddenly realizing that consumers without jobs in a consumer-driven economy tend not to have the wherewithal to consume.

Companies like Walmart, which spurred the offshore manufacturing trend to begin with, are faced with declining domestic sales, a problem most often attributed to the inability of their customers to afford their products. They are addressing this by trying to sell more locally produced materiel, but are finding, as the following article explains, that rebuilding that capability is more complicated, more time consuming and more expensive than they had imagined.

A part of that equation is that they were exporting production to countries whose governments were willing to help underwrite the cost in order to build their economies. Having fought to get the US and European governments to adapt austerity programs that eliminate such subsidization so that their products would be more competitive in western export markets, it would be ironic indeed if an outcome of the reshoring initiative were a rebirth of those self-same subsidy programs. JL

Tim Aeppel reports in the Wall Street Journal:

"What we're learning as we partner with these companies is that the supply chain often doesn't exist the way it used to," especially for more complicated products like TV sets, says Michelle Gloeckler, an executive vice president at Wal-Mart in charge of buy-American program.

Every flat-screen television set that rolls off conveyor belts here goes into a box marked "Assembled in the USA" before it ships to Wal-Mart customers.

What might surprise buyers is how little those TVs change after arriving from China in the same boxes.

With Wal-Mart making a big push for products "made in the USA," companies are working to meet the need. But "made in the USA," right now at least, doesn't exactly mean, well, made in the USA. 

Televisions are just one item that Wal-Mart Stores Inc.  WMT in Your Value Your Change Short position wants to obtain more often from U.S. suppliers under a pledge made last year to spend an added $250 billion over the next decade on U.S.-made goods. It has already identified 140 products ripe for the move—from shoes and bikes, to food dehydrators and bath towels.

But as the Element Electronics Corp. television factory here shows, the definition of "U.S. made" can be tricky. The company's experience illustrates how tough it can be to revive an industry from scratch, especially when it is a complex product such as an electronics item.

Bike Maker Makes a World Tour

Kent International has hopscotched the globe in search of cheap labor. Its latest stop: South Carolina.

On a recent morning, three factory workers hunch over boxes, pulling out TVs one at a time and gently laying them on a conveyor. Another worker checks for scratches. At the next station, two workers with pneumatic screwdrivers open the back of each unit.

Other workers down the line insert memory boards, also made in China, and conduct an array of mechanical tests. At which point, Element's work is largely done.

The U.S. had 150 television manufacturers in the heyday of the 1950s. Today, no one makes even TV components in the U.S., so everything has to be imported. The costliest part—about 65% of the value of a flat-screen TV—are the delicate glass panels produced in Asian factories and later integrated with electronics in a process known as backlighting.

Element, based in Eden Prairie, Minn., has long imported Chinese-made televisions under its brand name, with Wal-Mart as one of Element's biggest customers. The company began experimenting with U.S. production in 2012 using a small line for final assembly in borrowed space at a factory outside Detroit.

Last year, as Wal-Mart was ramping up its buy-American campaign, Element Chief Executive Michael O'Shaughnessy says he got a call from the retailer asking how rapidly he could expand into a larger factory if Wal-Mart committed to buy everything he produced. Element opened its facility here this March in a renovated shirt factory on the outskirts of this former mill town.

The deal strengthens his relationship with Wal-Mart and makes financial sense, Mr. O'Shaughnessy says. The cost of finishing televisions in South Carolina is comparable with Asia and constructing a more substantial portion of each TV will allow him to squeeze profit out of tiny shifts in the costs of parts and raw materials.

Once established, the company wants to do more work domestically or find U.S. or foreign suppliers willing to set up shop nearby to serve Element with parts. One side of the factory is already set aside for lines to do backlighting of glass panels, which is at least two years away.

"In a couple of years, even some of the inexpensive metals and plastics will be done domestically," Mr. O'Shaughnessy says, "either by suppliers from Asia who come here to produce or by domestic suppliers who decide to get into it."

For now, though, Element's assembly work is limited.

Wal-Mart says its suppliers determine the best way to make products and that it has always expected it would be difficult for some manufacturers to expand U.S. output.

"What we're learning as we partner with these companies is that the supply chain often doesn't exist the way it used to," especially for more complicated products like TV sets, says Michelle Gloeckler, an executive vice president at Wal-Mart in charge of buy-American program.

To ease the way, Wal-Mart is organizing a meeting next month to bring together companies that want to make new items with U.S. manufacturers that have excess capacity. The retailer also has hired Boston Consulting Group, which has studied rising labor and shipping costs overseas, to help these producers.

"The suppliers will follow demand," says BCG senior partner Harold Sirkin. "We've seen it happen in the U.S. before" in the automotive and other industries. As more foreign car makers set up factories in the U.S., suppliers from their home countries often follow them.

A big incentive for manufacturers is Wal-Mart's commitment to buy what they produce. The retailer sometimes offers long-term contracts—which it typically doesn't do—to encourage investments in machinery and factories.

Element declines to discuss details of its Wal-Mart contract, but says it already has exceeded the goals originally set for the project. The factory now employs 185 workers on three assembly lines and plans to keep hiring, with three more lines planned in coming months.

Tariffs are an unforeseen problem. When Element planned the factory, it expected Congress to extend an exemption from a 4.5% tariff on television panels, but that didn't happen. "There are only so many places where I can absorb 4.5% in a very margin-oriented business," Mr. O'Shaughnessy says. "Right now, we're eating it."

Meanwhile, Mr. O'Shaughnessy says his facility looks exactly like a Chinese television factory and operates much the same way—at least for the final stages of assembly. The conveyors and equipment are imported from China and are being installed with the help of Chinese engineers.