Tuesday, May 1, 2012

GE's Billion Dollar Gamble on Reshoring

The trend over the past several decades has been unmistakeable...manufacturing jobs in the United States have been moved offshore. That trend can easily be seen in one of America's blue chip companies, General Electric (NYSE: GE). At the end of 2011, a good number of its employees – 170,000 of 301,000 total – resided in countries like South Korea, Mexico and China.

However, GE has been one of the major companies leading the charge to bring manufacturing jobs back home to the U.S or 'reshoring'. Since 2009, the company has created 13,500 new jobs in this country with 11,000 of them in manufacturing. Overall, the United States has added 429,000 factory jobs in the past two years, barely replacing a fifth of the jobs lost during the recession.

And now GE is placing a large bet - $1 billion – on the company's domestic appliance business. This business, together with its lighting business, accounts for 6 percent of General Electric's revenues.

This will be a tough mountain for GE to climb. The North American appliances business is pretty much a no growth business. According to two of GE's appliances rivals, Whirlpool Corporation (NYSE: WHR) and Electrolux AB ADR (OTC: ELUXY) total sales in North America fell by about a quarter between 2006 and 2011. Whirlpool expects sales this year to grow by no more than 3 percent. No surprise then that this division's profit margin was only 3.5 percent last year, much less than the 15 percent or higher GE's other industrial divisions achieved.

GE is moving its appliances business back onshore because it found out, in the words of the chief executive of GE Appliances Chip Blakenship, that “over time [offshoring] wasn't that sustainable a business model” after enjoying the one-off cost benefit. These benefits have largely disappeared as wages have risen in China. When adjusted for productivity, U.S. wages will be only 2.5 times Chinese wages versus 4.6 times in 2006, according to the Boston Consulting Group. In addition, GE found that an extended supply chain generates some of its own problems due to higher energy costs.

The company decision to reshore these appliance manufacturing jobs back to the U.S. was based on several factors such as $17 million in tax incentives. But the main reason was the adoption of “lean” manufacturing techniques that make its U.S. plant in Louisville, Kentucky more efficient.

The interesting note here is that these techniques were pioneered by Japanese automaker, Toyota Motors ADR (NYSE: TM). These techniques also mark a dramatic shift away from the six sigma management culture at the company instituted by former CEO Jack Welch. Instead of a top-down management style, Toyota's methods places a stress on staff at all levels to focus on raising performance.

At GE's Louisville facility, the “lean” manufacturing techniques have meant putting all the functions associated with manufacturing appliances onsite such as development, design, engineering, quality control and production. GE's CEO Jeff Immelt said that, by using these lean production techniques, its Louisville plant has cut by 68 percent the time needed to build a dishwasher. Thanks to being 'lean', employment at the plant is expected to jump from about 4,100 today to 5,000 next year.

But as stated before, it will a tough go for GE. About half of all the appliances sold in the United States are imported. Korean competitors like Samsung and LG will be difficult to beat, not to mention Sweden's Electrolux and US-based Whirlpool. American workers surely hope that GE will be successful. As will its shareholders who would enjoy an upgrade in its brand if its $1 billion appliances gamble pays off.

1 comment:

  1. Now does anyone seriously believe that GE. The so called company that brings good things to light is going to bring back a large amount of their production back to the united states. All this is a a clever public relations ploy.