The exchange took place at a Silicon Valley dinner party, a 2011 gathering of top U.S. technology executives. Official White House photos of the event depict a cozy atmosphere: warm lighting, attendees mid-toast, glasses of white wine in hand, jackets draped over the backs of chairs. According to the New York Times article, "How the U.S. Lost Out on iPhone Work," Apple Co-founder, CEO and Chairman Steve Jobs was asked about the possibility of iPhone manufacture returning to the United States.
"Those jobs aren't coming back," he answered.
It was a typical Jobs-ian response—blunt, direct, pragmatic. But given the intimate setting—and that the asker was none other than President Barack Obama—the words carried extra gravitas. It was a sobering analysis of the state of U.S. manufacturing, delivered without euphemism, without lip service. The kind of analysis one would expect at a boardroom meeting, not a dinner party with the President.
Jobs was referring to production of the iPhone, but the implications were enormous: If Apple, one of the most powerful companies in the U.S., had openly embraced offshoring as the future, there could no longer be hope for American manufacturing. Surely, whatever dominoes were left standing would soon fall.
Only, they didn't.
Jobs may have been right in saying manufacturing jobs aren't coming back—not in full, anyway. But American manufacturing is still viable. U.S. companies just need to understand what they're up against, and how to compete against it.
"It's All About Price": Understanding the Exodus
4.7 million—that's the number of U.S. manufacturing jobs lost between 2001 and 2010, reported newgeography.com. It's difficult to measure precisely how many of those losses are the result of offshoring, but an Economic Policy Institute analysis of the widening U.S.-China trade deficit over that nine-year span put the number at 1.9 million.
There are a number of complex socioeconomic and geopolitical factors behind this exodus of American manufacturing, but for Frank Romano, professor emeritus of the Rochester Institute of Technology School of Print Media, there's a succinct explanation.
"It's all about price," he said. "You can print a job in China for the price of the paper for the same job in the U.S., even with the shipment—offshoring is not new, U.S. books were being printed in Singapore two decades ago."
Justin Zavadil, vice president of sales and vendor relations for American Solutions for Business, Glenwood, Minn., noted that for many U.S. manufacturers, turning to overseas labor was one way to meet otherwise unattainable customer demands. "The cost of labor is a major advantage for overseas suppliers," Zavadil said.
"Oftentimes it comes down to pricing on large quantities. Larger customers demanded much better pricing for their large orders, and the U.S. market was not able to accommodate the demand," he explained. "Manufacturing overseas is considerably less expensive."
Cheap labor wasn't the only advantage. According to Mel Ellis, president of Milwaukie, Oregon-based HumphreyLine, offshoring also allowed U.S. companies to significantly reduce the operational costs associated with running a factory.
"American manufacturers could rid themselves of the headaches involved in operating a plant, and [were now liberated from] significant investments in equipment, payroll, maintenance, etc.," he explained. "For the most part, manufacturing became more of a variable cost, rather than fixed."
Advantage America
Despite the gloomy job loss statistics for American manufacturing, and the tantalizing promise of lower operating costs and higher bottom lines offered by offshoring, Ellis believes that U.S. manufacturing—in the print and promotional products industries, at least—is poised for a comeback.
"We think we are very well-positioned for future growth as the bloom of importing comes off the rose," he said. "The benefits of being our own manufacturer get more and more obvious every day, to the point that being a domestic supplier has become an unfair advantage."
The numbers back him up. The New York Times reported that prior to last year, U.S. manufacturing employment had not risen since 1997. Yet, in January, American manufacturing companies added jobs for the second consecutive year.
Romano cited changing economic conditions overseas as a possible reason for the resurgence.
"Asian labor rates are rising as their standard of living is rising," he commented. "It happened in Japan and South Korea in the 1940s and '50s. Once their labor rate reaches a certain level, offshored work will start to move back to the U.S."
Ellis mentioned that U.S. manufacturers have several advantages that could speed up the process.
"If you actually make the product, you should never run out of inventory," he said.
"If we get low on an item, we simply turn on the machine and make some more. Responding to sudden shifts in customer demand becomes as easy as stepping on the gas in traffic," Ellis added. "We've been able to ship over 99 percent of our orders complete and on time for the past 18 years in a row."
Zavadil pointed to product safety. "Safety is a big deal in the promotional products world," he stated. "We've demanded our U.S. suppliers provide us with their CPSIA certificates of compliance for their products. These are much easier to obtain for U.S. suppliers."
Ellis said domestic manufacturers have agreed quality levels (AQLs) with raw materials suppliers, and are protected under fraud statutes if suppliers dilute or modify formulas. This helps assure high product safety standards.
Furthermore, he noted the legal benefits of working within the U.S.
"Since we are subject to American labor laws and environmental regulations, we don't have to be concerned about hostile working conditions, excessive overtime, substandard wages or other [negative] things that have made the news recently," Ellis said.
And then there's good old-fashioned patriotism.
A 2007 Gallup poll concluded that 72 percent of Americans pay attention to country of origin when making a purchase, with 60 percent to 70 percent stating they'd buy certain U.S.-made products over less expensive Chinese equivalents. A 2010 survey conducted by Harris Interactive indicated that 61 percent of U.S. adults were more likely to buy a product if it was advertised as "Made in America."
"End-buyers are asking more frequently for American-made products these days," Ellis said. "Many Americans are tired of seeing jobs going overseas when our economy is under such stress [already]. For a lot of buyers, placing an order with an American manufacturer brings an important feel-good value with it."
Staying Competitive
Ellis is one of U.S. manufacturing's staunchest supporters and practitioners, but he recognizes the challenges of going head-to-head with overseas production on price. He suggested staying away from product areas with high manufacturing labor and automating where possible.
"At HumphreyLine, we use automated filling equipment, so our labor costs are minimal. Not only do we not use much labor in these processes, but we also avoid the cost of shipping goods across the Pacific, and we can hold our investment in inventory to a fraction of what an importer has to carry," he stated. "We're careful to restrict our product line to include only those items that can be manufactured using automated equipment; otherwise, we'll find ourselves up against cost competition from overseas."
Romano concurred. "Automation helps," he noted. "Short runs will always be printed locally and more and more work is now short run."
Still, large orders that don't require short turnaround times might continue to be a problem for U.S. manufacturers, Zavadil said. He explained that in the competitive print and promotional products markets, U.S. suppliers need to find other ways to counterbalance the price advantage of overseas manufacturing.
"Customer service and accountability will always be the best weapons to combat bottom of the barrel pricing," he remarked. "When an order goes bad, U.S. suppliers need to stand behind their work, and most of them do just that. This is worth more than a few percentage points of gross profit."
Zavadil continued. "On the print side, any pricing advantages we have found by going overseas are usually eaten up in freight costs. U.S. plants are much more accountable and we have more control over our orders when using local vendors," he said. "We pride ourselves on providing top-notch customer service to our clients—it's an extremely important aspect of the whole process."