Complex mix of factors determines where to manufacture products

Jan. 25, 2017

In a Monday meeting with business leaders in the White House, President Donald Trump warned the leaders, “If you go to another country…we are going to be imposing a very major border tax,” as reported in The Wall Street Journal.

This warning follows an emphasis throughout his campaign and during the transition on his goal of returning manufacturing jobs to the United States. That would probably include the jobs the Hyde Group tool company transferred overseas in 2010 when it outsourced production of mass-market putty knives and wallpaper blades to China.

Bob Clemence is vice president of sales and great-grandson of the man who bought the Southbridge, MA, company in the 1890s. Adam Vaccaro at The Boston Globe quotes Clemence as saying, “At heart, we’re manufacturers. It was the hardest thing for us to do, us in a fourth-generation family. In order for us to stay in business and still employ people, we had to move our low-end business off-shore. It really was like a stab in the heart.”

Now, Hyde Group finds it is 40% cheaper to make tools in China than in Southbridge. “Forty percent [savings] is a huge number to overcome,” Clemence said, as quoted by Vaccaro. “We’ve determined that if it’s 20% or less, we’re going to do it domestically.”

Adds Vaccaro, “As Trump cajoles American companies into returning production to U.S. soil, experiences like Hyde’s illustrate the complex, multifaceted decisions manufacturers face as they choose where to build their products.” And labor costs are only part of the issue. Costs of raw materials and energy also factor in, as does the likelihood of automation.

Vaccaro quotes Enrico Moretti, professor of economics at the University of California, Berkeley, as noting that even if factories stay in the United States, production will be increasingly automated. “It’s going to be not an easy job,” said Moretti. “I’m not sure there is one explicit policy, a magic switch, that executive power in Washington can switch to retain jobs in the U.S.”

Vaccaro recounts the experience of Manufacturing Resource Group, a maker of cable assemblies and wire harnesses based in Norwood, MA, and which opened a second factory in Mexico in 2011. He quotes MRG president Joe Prior as saying, “The decision to open in Mexico wasn’t ours. We were told that, ‘You need to have a low-cost option, or we’re not going to be able to do business with you.’” Prior said that if the President imposed a tariff on the products manufactured in Mexico, the cost would probably be passed on to customers.

Another issue is overseas competitiveness. Eastern Acoustic Works, Vaccaro reports, is closing a factory in Whitinsville, MA, laying off 27 workers and moving production to China. A tariff might force the company to move production back to the U.S., but at the expense of international clients because U.S.-made products wouldn’t be competitive in overseas markets. The company doesn’t have sufficient scale to support domestic and overseas plants. Nevertheless, and indicating the complexity of the issue, tariffs could help Eastern Acoustic Works by making competitive products from Europe more expensive.

Vaccaro suggests specialization might be key to keeping manufacturing jobs in the U.S. He notes that Hyde Group still makes specialized blades and cutting tools that customers order in small quantities in Southbridge.

Still other companies—such as CyPhy Works, a Danvers, MA, company that make drones for military, government, and corporate clients—want to maintain tight oversight over production. Vaccaro quotes chief executive Lance Vanden Brook as saying, “Massachusetts is always going to have a good quality workforce here, and we’ve got a culture in Massachusetts of good, hard-working, smart individuals. That’s going to drive companies like ours and others who want access to that high-quality labor pool. The reality is we could probably go at some point and offshore the manufacturing, but we sort of look at it like there’s a variety of reasons to keep it here.”

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