Has the outsourcing tide turned?

Recent bribery charges against Rio Tinto executives, coupled with rising costs and continuing counterfeit and supply chain problems is seeing the push to move manufacturing production to China weaken, if not reverse.

Recent bribery charges against Rio Tinto executives, coupled with rising costs and continuing counterfeit and supply chain problems is seeing the push to move manufacturing production to China weaken, if not reverse.

IN recent years, getting products manufactured in China has been easy; there were always plenty of Chinese manufacturers ready to undercut our manufacturers, often by huge margins. Wages were ridiculously low, quality varied considerably, but in general was OK, and as long as you were prepared to wait months for delivery – it was a no brainer for many.

But gradually the China equation is changing, costs are rising, and counterfeits and extended lead times continue to be problematic, with a trickle of manufacturers reversing their outsourcing decisions, opting to return some of their manufacturing in-house.

The recent bribery charges against Rio Tinto executives, has been a stark reminder that China is not a democratic country, and its leaders can change the rules “in the national interest”, as needed.

While Stern Hu and his colleagues have now been accused of receiving bribes from unnamed officials at Chinese steel mills, rather than earlier apparent accusations of handing out bribes, it is unlikely to change the risk of potential long jail sentences for the four executives.

The arrests came the statutory 37 days after the executives were first detained on July 5, in a case that has sent ripples through the global business community, especially Australian manufacturers sourcing product from there.

According to General Electric’s CEO Jeffrey Immelt, overseas outsourcing has gone too far and US companies need to expand domestic production, a “bellwether of what’s happening in manufacturing”.

Besides GE’s efforts to manufacture more within the US, other major companies such as US electrical-equipment maker Emerson has shifted some production of items such as appliance motors from Asia to Mexico and the US, in part to be closer to customers in North America.

Many manufacturers got hurt when the recession hit; they were left holding large backlogs of goods ordered from overseas. Producing closer to customers – and limiting the inventory in the pipeline – is one solution.

A recent article in the Wall Street Journal highlighted why Farouk Shami, a Palestinian-born hairdresser who built a $US1bn manufacturing company around a popular line of hair irons, is moving all his production of hand-held appliances from China to a new factory in Texas.

The move appears to fly in the face of conventional wisdom, which says gadgets like this are best made in a low-cost country. But, he says, outsourcing has led to a loss of control over manufacturing and distribution.

According to Shami, the company will make more money this way, with “better quality and a better image”.

He says his company, Farouk Systems, spends about $US500,000 a month fighting counterfeits, most of which originate in China. The company collects the fake products and tracks the source, and then brings action in China to shut down illegal producers.

He says having production under his nose will help him control quality and inventory, and also fight the fakes, since imported irons will automatically be suspect. He sells in 104 countries, but the US represents over 60% of the company’s sales.

It remains to be seen whether Shami can produce cost-effectively in the US. The company is using automation to reduce the number of workers needed to assemble its tools and is redesigning products to make them easier – and therefore cheaper – to snap together.

Shami says the Texas-made hair irons will cost about $US2.50 more to produce than the China-made irons; and plans to absorb the cost without raising the retail price. The company expects to have 1200 workers when the factory is at full speed in December.

He says some costs will fall as large-scale production gets under way. For example, one Texas supplier of plastic parts initially charged four times the cost of the Chinese supplier, but cut the price to near parity once it became clear that orders would be large and steady.

Shami invented his hair iron, the Chi, in the late 1990s. His innovation was to use ceramic plates to generate a gentler heat.

Even though he priced it three times higher than most existing irons, it was a success. However a growing wave of counterfeits has driven down prices and created a dilemma for the company, which often finds that defective Chis returned to the company for refunds are actually knock-offs.

Shami says he did not patent the innovation because his experience in patenting his earlier hair colour product took years.

But he says the company can compete by continuing to innovate, such as by adding electronic controls, which will command a premium.

With local, state and federal governments keen to promote Australian made products where they can, and consumers becoming increasingly aware that locally-made goods mean local jobs; the outsourcing tide might have already reached its lowest ebb.

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