The GeoSpring water heater—the one that just came home to Louisville from China—looks a little like R2‑D2, the Star Wars robot, although taller and slimmer. It has a long gray body, and a short top section—the brains—in gray or bright red, with a touch-pad control panel.
The magic is in that head: GE has put a small heat pump up there, and the GeoSpring pulls ambient heat from the air to help heat water. As a result, the GeoSpring uses some 60 percent less electricity than a typical water heater. (You can also control it using your iPhone.)
The GeoSpring is the kind of product we’ve come to expect will arrive on a boat from China—not much more than a curve of rolled steel, some pipes and heating elements, a circuit board, a coat of paint, and a cardboard box. And for the first two and a half years that GE sold the GeoSpring, that’s exactly where it came from.
At Appliance Park, this model of production—designed at home, produced abroad—had been standard for years. For the GeoSpring, it seemed both a victory and a vulnerability. The GeoSpring is an innovative product in a mature category—and offshore production, from the start, appeared to provide substantial cost savings. But making it in China also meant risking that it might be knocked off. And so in 2009, even as they were rolling it out, the folks at Appliance Park were doing the math on bringing it home.
Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.
- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
- The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
- In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
- American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
- U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
So much has changed that GE executives came to believe the GeoSpring could be made profitably at Appliance Park without increasing the price of the water heater. “First we said, ‘Let’s just bring it back here and build the exact same thing,’ ” says Kevin Nolan, the vice president of technology for GE Appliances.
But a problem soon became apparent. GE hadn’t made a water heater in the United States in decades. In all the recent years the company had been tucking water heaters into American garages and basements, it had lost track of how to actually make them.
The GeoSpring in particular, Nolan says, has “a lot of copper tubing in the top.” Assembly-line workers “have to route the tubes, and they have to braze them—weld them—to seal the joints. How that tubing is designed really affects how hard or easy it is to solder the joints. And how hard or easy it is to do the soldering affects the quality, of course. And the quality of those welds is literally the quality of the hot-water heater.” Although the GeoSpring had been conceived, designed, marketed, and managed from Louisville, it was made in China, and, Nolan says, “We really had zero communications into the assembly line there.”
To get ready to make the GeoSpring at Appliance Park, in January 2010 GE set up a space on the factory floor of Building 2 to design the new assembly line. No products had been manufactured in Building 2 since 1998. An old GE range assembly line still stood there; after a feud with union workers, that line had been shut down so abruptly that the GeoSpring team found finished oven doors still hanging from conveyors 30 feet overhead. The GeoSpring project had a more collegial tone. The “big room” had design engineers assigned to it, but also manufacturing engineers, line workers, staff from marketing and sales—no management-labor friction, just a group of people with different perspectives, tackling a crucial problem.
“We got the water heater into the room, and the first thing [the group] said to us was ‘This is just a mess,’ ” Nolan recalls. Not the product, but the design. “In terms of manufacturability, it was terrible.”
The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.
In the end, says Nolan, not one part was the same.
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.
For years, too many American companies have treated the actual manufacturing of their products as incidental—a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough—if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality—who cared what language the factory workers spoke?
This sounded good in theory. In practice, it was like writing a cookbook without ever cooking.
Lou Lenzi now heads design for all GE appliances, with a team of 25. But for years he worked for Thomson Consumer Electronics, which made small appliances—TVs, DVD players, telephones—with the GE logo on them. Thomson was an outsource shop. It designed stuff, then hired factories to make much of that stuff. Price was what mattered.
“What we had wrong was the idea that anybody can screw together a dishwasher,” says Lenzi. “We thought, ‘We’ll do the engineering, we’ll do the marketing, and the manufacturing becomes a black box.’ But there is an inherent understanding that moves out when you move the manufacturing out. And you never get it back.”
It happens slowly. When you first send the toaster or the water heater to an overseas factory, you know how it’s made. You were just making it—yesterday, last month, last quarter. But as products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific.
What is only now dawning on the smart American companies, says Lenzi, is that when you outsource the making of the products, “your whole business goes with the outsourcing.” Which raises a troubling but also thrilling prospect: the offshoring rush of the past decade or more—one of the signature economic events of our times—may have been a mistake.
Business practices are prone to fads, and in hindsight, the rush to offshore production 10 or 15 years ago looks a little extreme. The distance across the Pacific Ocean was as wide then as it is now, and the speed of cargo ships was just as slow. A lot of the very good reasons for bringing factories back to the U.S. today were potent arguments against offshoring in the first place.
It was important to innovate, and to protect innovations, 10 or 15 years ago. It was important to have designers, engineers, and assembly-line workers talk to each other then, too. That companies spent the past two decades ignoring those things just shows the power of price, even for people who should be able to take a broader view.
Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. “The way we see it,” says Moser, “about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.” Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home.
“There was a herd mentality to the offshoring,” says John Shook, a manufacturing expert and the CEO of the Lean Enterprise Institute, in Cambridge, Massachusetts. “And there was some bullshit. But it was also the inability to see the total costs—the engineers in the U.S. and factory managers in China who can’t talk to each other; the management hours and money flying to Asia to find out why the quality they wanted wasn’t being delivered. The cost of all that is huge.”
But many of those hidden costs come later. In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation. And it’s easy to assume that globally distributed production will hum along more smoothly than it often does in practice: however strong the planning, some of those shipping containers will be opened to reveal damaged or substandard goods, and some of them won’t have the number or variety of goods a company needs at that very moment. “All you need is to have to hire one or two 747s a couple times to get product here in a hurry,” says Shook, “and you lose those savings.”
Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made. When asked about the value of the original rush offshore, Mayor laughs.
“Twelve years ago, I saw a lot of boards of directors and senior executives saying, ‘Three years from now, I’m going to be sourcing $4 billion in product from China. Go figure out how to make it happen.’ ” Part of the rationale, from the start, was merely to gain a foothold in the Chinese market. And for many companies, that made sense, at least to some extent. “But if you press them on their savings by sourcing from China for North America, I get stories like ‘Oh, I asked about that six months ago. I had five finance guys working on it, and they couldn’t come up with any savings.’ At the end of the day, they say, ‘If we were doing this for the U.S. market, we should never have gone to China in the first place.’ ”
GE is not alone in moving the manufacture of many of its products back to the U.S. The transformation under way at Appliance Park is mirrored in dozens of other places, with Whirlpool bringing mixer-making back from China to Ohio, Otis bringing elevator production back from Mexico to South Carolina, even Wham-O bringing Frisbee-molding back from China to California. The Boston Company published a paper in May on ways for investors to capitalize on the U.S. factory revival. ISI Group, an investment-research company, put out a 98‑page report in August, piling up reasons for the return of a strong U.S. industrial sector. Nancy Lazar, who co-authored the ISI Group report, says, “This is the beginning of a manufacturing renaissance. I’ve been saying this since 2009. Even the industrial companies told me I was crazy. Why are they telling me I’m crazy? Because they’ve spent the last 15 or 20 years putting the plants outside the U.S. That’s over.”
The recalibration of costs in recent years is one reason, and the competitive benefit of keeping production stateside is another. But the logic of onshoring today goes even further—and is driven, in part, by the newfound impatience of the product cycle itself.
Just a few years ago, the design of a new range or refrigerator was assumed to last seven years. Now, says Lou Lenzi, GE’s managers figure no model will be good for more than two or three years. This phenomenon is not limited to GE. The feverish cycle of innovation and new products beloved in the electronics world has infected all kinds of consumer categories. Products that once seemed mature—from stoves to greeting cards—are being reinvigorated with cheap computing technology. And the product life cycle is speeding up—many goods get outflanked by “smarter” versions every couple of years, or faster.
Factories take a while to settle into a new product, a new design. They face a learning curve. But models that have a run of only a couple years become outdated just as the assembly line starts to hum. That, too, makes using faraway factories challenging, even if they are cheap.
It is not, in fact, your mother’s refrigerator anymore. The highest-end French-door fridge being made at Appliance Park retails for $3,099. Its auto-fill water spigot is unique, and it is lit inside by 10 recessed LED bulbs that use almost no energy, create almost no heat, and never burn out.
The addition of high-tech components to everyday items makes production more complicated, and that means U.S. production is more attractive, not just because manufacturers now have more proprietary technology to protect, but because American workers are more skilled, on average, than their Chinese counterparts. And the short leap from one product generation to the next makes the alchemy among engineers, marketers, and factory workers all the more important.