Insourcing?

GE Hybrid Electric Water Heaters Appliance Park, Kentucky

James Fallows, in The Atlantic, reminds us that one of the problems with Boeing’s Dreamliner has been excessive outsourcing. And he directs us to Charles Fishman‘s story, in the same publication, about some insourcing in General Electric’s household appliance manufacturing.

Fishman’s story is really two stories.

One is that outsourcing manufacturing to China became less attractive because of simple cost changes: manufacturing wages rose in China and fell in Louisville; the price of fuel for ships rose, while US natural gas prices fell.

Fishman’s second story reads like something from Western discoveries of the wisdom of Japanese manufacturing, circa 1985: higher quality and lower cost can be achieved when the engineers and designers work with the manufacturers – “design for manufacture” it’s been called. It adds to that the discovery that offshoring does lead to hollowing out, the loss of manufacturing capabilities and, after a while, the capability to design for manufacture – leaving what may be a fragile shell. Then manufacturing makes a triumphant return from its trip abroad, but now as a lean, Toyota-style system.

The second story is, of course, much more satisfying: it is a story of the victory of teamwork and good engineering over cost-cutting and offshoring and, equally important, it does not focus on either on reduced manufacturing wages or profligate use of natural gas in the US.

I’d like to believe that the second story – the warm and fuzzy one – is more important than the first. But the wisdom Fishman is finding in Louisville is not new – it has been well known to American manufacturers for more than thirty years, from back in the day when they woke up late to find Toyota and its compatriots eating their lunch. Not only is it well known and well tried, but aspects of it have proven very hard to transplant from Japan to the United States. And the fonts of that wisdom – big Japanese manufacturers – have themselves spent a couple of decades now offshoring, not because they couldn’t do lean production but because they wanted lower labor costs. Japanese companies are the really big investors in Chinese manufacturing. Watch them to see if offshoring is really in retreat.

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