Casting Shadows On China, Part 2
MiBiz Article
July 21, 2008
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Part 2
By Joe Boomgaard | MiBiz
WEST MICHIGAN – Castings produced in the US aren’t
big, dumb pieces of metal anymore. Likewise, the cost of oil
and Chinese labor isn’t what it used to be, either.
Foundries are increasingly looked to for innovation and value-added
processes, and when they are, many customers are finding it
cost effective to buy parts produced in the U.S. versus shipping
the work to China and paying the increasing cost of Chinese
labor.
Tim McMillin – director of marketing and product development
for Fairmount Minerals Ltd., an Ohio-headquartered foundry
sand supplier with several operations in West Michigan, including
Standard Sand Co. of Grand Haven, as well as a board member
of the American Foundry Society – said whereas a part
might have been assembled from four or five separate pieces,
foundries are coming to customers with ""inventive""
solutions for casting the entire part at once.
McMillin said they’re not relying on customers’
product engineers to find innovations. If they do, they won’t
be in business for long.
""A lot of foundries that do short run castings
– as long as they’re not connected to home construction
– are doing OK,"" McMillin told MiBiz.
Business in the alternative and wind energy and agriculture
sectors has also been particularly strong, he added.
""The amount of castings people are looking for
has grown in the last few years,"" McMillin said.
""The big challenge is that they used to compete
on a simple part and pour it faster. Today, they have to add
a lot of engineering capability … and help the customer
engineer the part.""
While Fairmount Minerals’ business has remained relatively
flat, McMillin said that’s not bad considering they
had predicted a reduction this year with the slowing of the
automotive market, a large customer. While automotive has
suffered, McMillin said the company has found many mid-sized
foundries are buying more and picking up the slack from the
automotive decline.
Higher wages, transport costs, not in China’s favor
According to Bruce Ferrin, associate professor of logistics
at Western Michigan University, many companies saved enough
in labor costs by offshoring production to offset logistics
costs in getting the parts back to the United States, especially
with industrial supply industries like foundries that have
long lead times.
""The transportation costs were not severe enough
to offset labor savings, but that’s what is starting
to change,"" Ferrin told MiBiz.
As energy costs have doubled, transportation costs have begun
to eat into the total savings in labor costs realized by sending
production overseas. On top of that, increasing Chinese labor
costs are reducing the offshoring advantage.
Ferrin said high-density, heavy, low-value items like castings
would be the first to be affected by such market changes.
If the petroleum prices double again in the next year, Ferrin
predicts more items will be affected.
""I think the big winner out of all this is Mexico,""
he said. ""In 80s and 90s when auto companies first
started to move production out of the U.S., Mexico was the
first place they moved to. They were close, but they had the
labor cost of a third world country.
""But a lot of stuff that went to Mexico moved
out and went to China and India. In the near term, I think
we’ll see a lot of stuff in China and India come back
to Mexico and even to the U.S.""
Ferrin sees ""two very powerful forces combining""
in the need to support a global supply chain and in the higher
cost of petroleum.
""If the total cost picture continues to skew,
you’ll gradually see the tide rise higher and higher
and engulf more industries,"" Ferrin said. ""If
it skews to where logistics becomes the dominant cost and
labor isn’t, (you’ll see a) shift more toward
domestic production.""
Coming home
According to John Cleveland, one of the founding members
of the Right Place Inc. Manufacturers Council, it’s
a ""good hypothesis"" that as the cost
of transportation and fuel increases, companies will ""change
their economic logic"" about their supply chain,
especially when it comes to heavy products, large and bulky
items and products that require expensive packaging.
More than five years ago, Cleveland was bullish that many
manufacturing jobs would come back to the U.S., but he didn’t
have any data. Now, success stories like Eagle Alloy, profiled
in the first part of this MiBiz series, are starting to back-up
his postulations.
Cleveland, who now works with the Innovation Network for
Communities, said when he was involved in looking into the
China issue for the Manufacturer’s Council, some suppliers
determined it didn’t make sense for them to import goods
from overseas, but many were getting pressured by their customer
base to have a certain percentage of goods sourced from China.
They thought it was cheaper in the long run.
He said purchasers have to weigh the cost of managing a distant
value chain and the cost of transportation against buying
the goods domestically.
""The question they have to talk about is …
where is the tipping point,"" Cleveland said.
""When you add it all up, a 40- to 60-percent swing
in sourcing costs will start to change your behavior,""
Cleveland said. ""Even when the cost argument could
be made, it takes a long time for that rationale to get embedded
in purchasing managers’ heads.""
The good news is that when and if the work comes back to
the U.S., manufacturers might also benefit from that stubbornness.
Co-location more common
While some of the work may be shifting back from overseas,
Cleveland said many companies have started to demand co-location,
in which a supplier sets up shop to manufacture goods inside
the purchasers’ facility or nearby the facility, often
in a sort of joint venture.
""Domestically, if it’s any kind of significant
product or supply chain, they’re getting more intensity
for co-location,"" he said.
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