
The Insourcing Boom - airlocksoftware
http://www.theatlantic.com/magazine/print/2012/12/the-insourcing-boom/309166/
======
jerf
American declinism has been fashionable this past decade or so, even before
the economic issues. And there are still economic issues. But it has a history
of being the first in the world to rise from the ashes of the old systems and
build the future, and while past results are no guarantee of future successes,
I am still optimistic that we are not yet spent.

American manufacturing will return. It may not be the job engine it once was,
but it is still a wealth engine. American energy prospects are suddenly
looking up, leading the world in both the tech to extract it and, this time,
the resources to extract. We are only at the beginning of tearing down our
scelerotic educational systems, but there is a good opportunity to build a
truly 21st century education system over the next decade or two. We remain a
high-tech economy. And we've got some wild cards up our sleeve, like a budding
space industry and advanced medical research, to say nothing of whatever
industry will come out of nowhere in the next ten to fifteen years that I'm
not even thinking of to become huge.

I celebrate anybody who succeeds, and I don't particularly care if America is
or remains "exceptional". I want everyone to succeed. I'm just saying that I
think there's good reason to believe that for all the challenges in the world
that America still has a very good chance to be in the set of successful
countries in the medium term (5-25 years).

~~~
Tuna-Fish
> American manufacturing will return.

It never left. The US manufacturing output steadily increased from the 50's to
the recent recession. Right now, it is at an all time high. The idea of
american manufacturing being shipped overseas is just _false_ , and I'm sick
of people repeating it.

What happened is that as wages got expensive, US labor was replaced by
machines where possible, and by some cheap process steps overseas where not
possible. Intel CPUs are a good example: They used to be made wholly in the
US, employing a lot of blue-collar workers. To save costs, the factories were
automated to the point where the only process steps left that employ a lot of
people without advanced degrees are packaging and testing. And then those were
shipped to Malaysia and Costa Rica. The high-capital process steps that create
most of the value in the system are still in Oregon, Arizona and New Mexico.

Manufacturing jobs, as they used to be, are _gone_. Not because of
globalization, but because of robots. And the old kind of manufacturing jobs
will never return -- it just doesn't make sense to pay people $30 a hour for
what could be done faster, cheaper and better by a robot.

~~~
specialist
What is the role of environmental regulations on locating silicon fabs?

A buddy of mine made a mint working as a welder building fabs in Phoenix when
they were leaving California in search of cheaper water and lower regulations.
He was very worried about the toxic emissions and very lax (non existent)
oversight.

------
droithomme
Interesting article but I wish they had more examples than a heat pump based
electric water heater and a $3100 refrigerator

The article is suggesting that jobs that can support a family are coming back,
but with the described poverty-level $13.50 wages for skilled line workers
that's obviously not the case. We're not talking high school dropouts either:
among the tasks given to the production workers is redesigning from scratch
products which use impractical and inefficient designs, at least according to
the scenario explained in the article. The article also points out that these
are lines where there are not many workers per line.

My own thoughts about the market were piqued by the description of the chosen
product. Here we have an electric heat pump heater that costs over $1300. This
is right at a time when running an electric heater, even an exceptionally
efficient one, has become a poor choice given the price of gas. Furthermore,
gas is very likely to remain cheaper than electric for many years. Not to
mention that gas heaters are simply more efficient for heating to begin with.
Rather than buy an $1600 chinese or $1300 american water heater, one can buy a
$150 mexican factory built water heater that runs on gas and will save many
thousands of dollars in energy costs over its lifetime. That's the rational
choice, it is unlikely this complicated electric one is going to be something
with a lot of market growth. Hopefully there are better examples of high
growth reasonably priced mass market items that can be built as well, which
have a chance at creating more than a handful of these $13.50 jobs (comparable
to the salary at CostCo or McDonalds, BTW).

For water heating one could also do what I did - use $50 worth of materials
and junk to build your own solar water heater that reduces the cost of water
heating to almost nothing. ([http://www.motherearthnews.com/renewable-
energy/1979-09-01/A...](http://www.motherearthnews.com/renewable-
energy/1979-09-01/A-Homemade-Solar-Water-Heater.aspx))

~~~
rayiner
$13.50 isn't poverty level. At 40 hours a week, 50 weeks a year, it works out
to $27,000/year, which is just about the median individual income nationwide.

This yields an after-tax net of $1,750 per month. You can rent a 2 BR
apartment in Louisville for $450 per month. The $1,300 left over is enough to
live quite comfortably in Louisville--heck I don't spend much more than that
in New York City (the difference is I pay $1,500/month on a studio).

~~~
debacle
You just got out of college. You went to a good school, you got good grades,
and you worked hard. There are no jobs in your field.

You're bringing in 1750 a month, but 500 of that is going to student loans.
450 goes to rent. 200 for heating in the winter. Add in the rest of your
utilities, and you're looking at 1300 a month. Do you have a car? 300 a month.
Do you want to eat? You can probably get by on 150 for food.

But you have no health insurance. You have no savings. You cannot start a
family because you can't support a family.

And, unless you get very lucky, this is going to be your situation until your
loans are paid off. You will be 35 when your adult life can actually start.

But if you're unlucky - if you get sick, if you need to take care of your
family, if nearly anything bad happens, regardless of how minor, you're
probably completely and utterly fucked to an extent that a lot of people can't
possibly realize.

~~~
jcnnghm
It you went to a good school, and got good grades, you probably are not
working this job. It seems that it has become fashionable to believe that
every job should pay upper middle class wages or not exist at all. Hindsight
should make it completely obvious what happened when unions forced that issue.
Those jobs went away and are not coming back, they were never sustainable.

------
w1ntermute
There can be a huge difference in quality between goods produced in the US and
those produced abroad, something that many people don't realize anymore
because they've gotten so used to buying cheap foreign imports and replacing
them more often.

When I was in school, I used to buy a new bag every year because they would
just tear and fall apart within 12 months. Eventually, getting tired of this,
I went online looking for a good bag. I found out about Tom Bihn[0]. Both
their management and their production is done in Seattle. The prices are
steep, but I decided to take a chance on them, given the good reviews on
various sites.

I've now had that same Tom Bihn bag for _five_ years, and it looks _exactly_
like it did the day I got it - not a single tear. I don't think you could say
that about any bags produced at an overseas sweatshop.

0: <http://www.tombihn.com/>

~~~
alanctgardner2
I was really impressed with Timbuk2, who make their custom bags in San
Francisco. I bought one for a friend and while the design was fairly simple
and the price was a bit high, it was solidly made.

Fast forward a few years, and I picked up one of their bags at a Mountain
Equipment Co-op (not quite a chain store, like REI in the States). This bag
also wasn't cheap, but when I checked the label it was made entirely in China.
The quality is not bad, but I haven't had a chance to abuse it for a few
years. I was mostly disappointed that they seem to promote the pro-American
rhetoric while the majority of their channel goods seem to be produced abroad.

I'm impressed with those Tom Bihn bags, because they seem to be
uncompromisingly made in America. I'm going to keep them in mind when I need a
new bag.

~~~
hapless
Timbuk2 still manufactures made-to-order products in America, where just-in-
time production makes sense. Who is going to wait six weeks for a custom bag?

Price-minimized, zero-margin, off-the-shelf crap for big box stores are a
different story. Then they can trade on their brand equity built with
embroidered logo bags and sell trash to the mass market.

~~~
alanctgardner2
OK, point by point:

\- turn-around for custom goods from China is not 6-weeks. It took a solid 2
weeks to get the bag, which is what I would expect. The cost to ship expedited
versus the labour cost is a wash, especially considering they stil had to post
the bag to me anyways.

\- The goods in-store are still marketed as premium goods; to use an HN
appropriate analogy, this is like me telling you that your Mac is crap because
you bought from a 3rd party retailer. For reference, this was $150 for a
laptop messenger bag. Not a ton of money, but not cheap considering there's no
leather, etc involved.

\- If you look at the store I mentioned, they're not really big-box. They're
in some awkward in-between yuppie place where everything is greenwashed. I
still shop there, but I'm pretty disenchanted since this incident.

\- This event has, in my mind, destroyed whatever brand recognition they had.
The product is alright, but I'd rather support a company that does everything
in NA.

The point being, the market're selling into would be more than willing to
absorb the cost of local production. I suspect at a point during their growth
they were unable to afford to scale up locally, and decided to contract volume
manufacturing for the channel. Now that they're well established, I would hope
that they would perform an exercise like the one in this article, and see if
moving production back makes sense.

~~~
hapless
Unless you have it done by air, it's about five weeks to get things in from
China -- four weeks of shipping, one week of customs.

(This is actually mentioned in the article)

~~~
alanctgardner2
I've had small parcels shipped by air from China (eBay, mostly). They
typically arrive in less than a week. They could drop ship directly from China
to the customer.

My point was, the cost of shipping by air versus hiring an American worker is
probably a wash. I suspect they do their custom work in SF because it's a
token gesture. Sort of local-washing, versus green-washing.

------
Jacob4u2
I found the story they give about GE forgetting how to make water heaters
interesting. The line you usually hear about startups creating their core
technologies in house and outsourcing non core things comes to mind.

Was GE originally known for manufacturing (or ability to manufacture) and then
lost that core ability? If they did, what would their core ability be after
outsourcing, management of manufacturing? Maybe I'm not making a good
connection there, but I think it could be.

~~~
SkyMarshal
Regarding GE, you can eyeball their public financial statements for a rough
idea of their manufacturing:financial ratio:

[http://www.ge.com/pdf/investors/events/10192012/ge_webcast_p...](http://www.ge.com/pdf/investors/events/10192012/ge_webcast_pressrelease_10192012.pdf)

They conveniently split their balance sheet between GE Capital and GE
(industrial/manufacturing). Roughly 70% revenue and profit from non-financial
(mainly manufacturing - from 747 engines, to trains, to energy, to MRI
machines, etc), ~30% from GE Capital.

So yeah, always have been and still very much a manufacturing company.

As a more general answer to your question, in case you missed it, there was a
good article and discussion a while back on companies losing manufacturing
through outsourcing, and its consequences:

[http://www.forbes.com/sites/stevedenning/2011/08/17/why-
amaz...](http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-
make-a-kindle-in-the-usa/)

<http://news.ycombinator.com/item?id=2907187>

TLDR: _“So the decline of manufacturing in a region sets off a chain reaction.
Once manufacturing is outsourced, process-engineering expertise can’t be
maintained, since it depends on daily interactions with manufacturing. Without
process-engineering capabilities, companies find it increasingly difficult to
conduct advanced research on next-generation process technologies. Without the
ability to develop such new processes, they find they can no longer develop
new products. In the long term, then, an economy that lacks an infrastructure
for advanced process engineering and manufacturing will lose its ability to
innovate.”_

An interesting counterexample that demonstrates the point is Intel - they've
maintained their manufacturing capability, and as a result lead the world in
lithography and process technology, a competitive advantage that allowed them
to compete with AMD in the mid-to-late 2000s even when AMD's chip designs were
better, and to dominate AMD now that both Intel's process technology and chip
designs are better.

Andy Grove has apparently dedicated his retirement to advocating for reshoring
manufacturing for the deep competitive advantage it confers [1].

[1]: <http://duckduckgo.com/?q=andy+grove+manufacturing>

~~~
gvb
FWIIW, GE Capital was closer to 50% of the revenue before the recession kicked
them in the teeth. Hard. Indications and rumors had it that GE Capital nearly
took the company down in the 2008/2009 time frame.

Ref:

"Loophole Helps GE Benefit From Bank Rescue Program" (article from 2009)
[http://www.washingtonpost.com/wp-
dyn/content/article/2009/06...](http://www.washingtonpost.com/wp-
dyn/content/article/2009/06/28/AR2009062802955.html)

Warren Buffet did a $3 billion "private bailout" in October, 2008
[http://www.bloomberg.com/news/2012-09-14/buffett-ge-bet-
pays...](http://www.bloomberg.com/news/2012-09-14/buffett-ge-bet-pays-off-
as-2008-crisis-warrants-top-strike-price.html)

------
woodchuck64
Simply put, if you manufacture in-house as well as design, both processes
innovate each other. But if you outsource manufacture, it's a black hole; very
little flows the other way because of language and cultural barriers.

~~~
zaidf
That assumes there is enough juice remaining in manufacturing optimization.
After a certain stage in a product's lifetime, you've done the bulk of the
optimization and doing manufacturing in-house could bring minimal benefit.

~~~
vajrabum
Let's not swap one assumption for another perhaps hidden one. In this case,
the assumption that the product life cycle is long enough that you ever have
"mature" products. The article points out that the appliance product life
cycles used to be 7 years or so and now they're 2-3 years and that a good bit
of the monetary advantage to building in the US came from product improvements
that arose from co-locating engineering and manufacturing and getting them to
cooperate.

------
airlocksoftware
I thought this was an interesting article, if a little light on any hard
numbers outside of one example (G.E.). Another anecdote that supports this is
Apple manufacturing a limited number of their new iMacs in the U.S.
[http://9to5mac.com/2012/12/02/is-there-some-secret-imac-
asse...](http://9to5mac.com/2012/12/02/is-there-some-secret-imac-assembly-
plant-in-the-u-s/)

I'm a little surprised they didn't mention advances in automation / robotics
that make cost of labor even less of a reason to offshore. The U.S.
manufacturing sector produces more than it ever has, despite the fact that
manufacturing jobs are down from 19.4 million jobs in 1979 to 11.5 million
jobs in 2010. <http://archive.mises.org/17964/u-s-manufacturing-output/>

~~~
rogerbinns
Unfortunately confusing manufacturing output with manufacturing employment
seems to be somewhat persistent in the US. The employment numbers going down
are seen as a bad thing, whereas it is the total output and productivity that
matter. If the entirety of US manufacturing could be done by one person than
that would be great!

We've been through this before. In 1870 US agricultural employment was around
75% of the whole workforce (~29 million people). Nowadays it is closer to 2%
(~3 million people). We produce orders of magnitude more food with
considerably fewer people.

~~~
makomk
It wouldn't be that great, because no-one would be able to afford all the
goods that were being manufactured...

~~~
suresk
This is an actual first-world problem, and dealing with it is going to be one
of the most important and interesting challenges of the next 50 - 100 years. I
see technology continuing to improve productivity, drive down demand for
labor, and exacerbate current inequality issues.

Our economic system isn't really setup to work well in a situation where
supply of labor drastically exceeds the demand for it.

~~~
rogerbinns
There are many academic pieces and work on the topic such as
<http://en.wikipedia.org/wiki/The_End_of_Work>

Obviously some of the difference will be soaked up by new professions that
didn't exist before. For example here is a list of jobs that didn't exist 10
years ago [http://finance.yahoo.com/news/10-jobs-didn-t-
exist-175608243...](http://finance.yahoo.com/news/10-jobs-didn-t-
exist-175608243.html)

I am convinced that prosperity is being driven by trade and specialisation as
put forward by Matt Ridley
[http://www.ted.com/talks/matt_ridley_when_ideas_have_sex.htm...](http://www.ted.com/talks/matt_ridley_when_ideas_have_sex.html)

Specialisation is a form of skill and so the issue is really what happens to
unskilled labour. Everyone "knows" that education is a fix, but current
education systems are extremely broken and closely modelled on the dawn of the
industrial age <https://www.youtube.com/watch?v=zDZFcDGpL4U>

It will be interesting to see if the cost of living goes down since that will
also greatly alleviate things. Increased automation should result in that.

~~~
pekk
Unless you start out with piles of capital, you have to get paid for doing
something in order to pay for things like food. If your labor is worth almost
nothing, you will be doing a lot of it in order to cover basic needs. That is
only prosperity for people who have the capital to take advantage of low labor
costs, for others it is hand to mouth.

There isn't any reason to suppose that demand for engineers and managers will
ever come anywhere close to 100% of the working population.

Meanwhile, the advantage of theft, violent crime and the black market improves
dramatically as wages decline to nothing.

~~~
rogerbinns
You are assuming capitalism for everyone which is not a given. Heck it isn't
even how things are at the moment. It is increasingly possible to shift the
proportion of people paid for labour/capitalism to being supported by the
state. If the costs of living go down (a likely consequence of increased
automation) then the financial burden would decrease too.

------
thalecress
On one hand, outsourcing rapidly transferred several decades of manufacturing
and design knowledge to GE's soon-to-be competitors. (I haven't seen a Haier
fridge on sale in the US yet but it's a matter of years, not decades.) On the
other, maybe it juiced executive bonuses for a few years and may have
permanently removed organized labor from the US private sector.

I wonder to what extent insourcing represents surrender for US firms seeking
access to the Chinese market. China's leaders don't seem keen on idea of
letting foreign firms sell in China longer than it takes for Chinese firms to
pick up knowledge. The licensed production of Russian Sukhoi-27 warplanes
comes to mind - the Chinese agreed to pay for 200, assembled from kits with
Russian assistance. After 100 had been built, the Chinese said "no more" - and
started advertising an indigenous copy for international sale. [1]
<http://en.wikipedia.org/wiki/Shenyang_J-11#J-11>

~~~
patrickgzill
I have seen Haier products, including a small fridge, in stores since about 2
years ago.

------
DigitalSea
This was a really interesting article. It's interesting the misconceptions
that some people have about outsourcing and the perception that it's cheaper.
When you factor in transport, the price of oil and rising cost of living
everywhere in the world (especially China) it makes sense that less reliance
on petroleum and outsourced labour actually works out better in the end. It
was once standard for products to say Made in the U.S.A and then the
outsourcing boom kicked in and people got used to Made in China for
electronics or Made in Indonesia for a lot of shoe-wear. Buying a product made
in your own country is currently considered a premium product purchase. For
example buying a hand-wired guitar amplifier or even hand-made guitar that is
built in the U.S commands a much higher price and some are happy paying it
because the quality is considerably higher, attention to detail and
intricacies like soldering and component placement.

I would really love to see the manufacturing world return to the mantra of,
"this needs to be designed and built to last as long as possible", it won't
happen but it would be nice to live in a world again where the best components
and design decisions are made with the consumer in mind, not lining the
pockets of CEO's. Once upon a time companies created products that lasted
forever, I've seen televisions from the 50's with original picture tubes and
components still working.

It's good to hear General Electric (a company I am not overly fond of) have
started manufacturing products back in the United States again. Companies like
GE returning jobs and manufacturing back home are the only hope this economy
has.

~~~
pinaceae
there never was a time when everything was built to last.

sure, to this day you can find old stuff that is still working perfectly. but
what you don't see is all the other stuff that has been discarded, thrown
away, replaced. survivor bias at its best.

right now products need to adhere to safety standards, energy efficiency
standards and have green certificates. if something breaks and just puts a
minor scratch into you major lawsuits are going off.

in the past, you simply died in an accident (whoops, sorry about the
electrocution or yes, our cars sometimes go up in flames).

------
ph0rcyas
Here is something that's easily overlooked: bringing design and manufacturing
together promotes innovation. Having a more rapid iteration cycle is
important, but why? Here's a principal reason: it allows design flaws to
become visible in the manufacturing, and leads to a redesign if necessary.

Having both these modules in close (spatial and temporal) proximity helps
minimizing efforts spent in irrelevant problems. The general rule holds for
most softwares with 'manufacturing' replaced by user appreciation.

The hidden cost of taking manufacturing offshore is that a GREAT deal of
industrial knowledge is lost. How do you know a problem needs to be taken into
consideration if... you don't even know what the problem is?

The glorious days of Bell Labs seems like heaven for tinkerers. Designing,
implementing and manufacturing camps don't alienate but simply part of one
living organism.

------
rmason
Here's a complex sitting empty in Detroit for over fifty seven years that
dwarfs the GE appliance complex,the old Packard plant.

[http://www.freep.com/article/20121202/NEWS01/120823062/The-P...](http://www.freep.com/article/20121202/NEWS01/120823062/The-
Packard-Plant-Then-now-interactive-comparison-
photos?odyssey=mod%7Cdefcon%7Cimg%7CFRONTPAGE)

------
dchuk
Just finished reading this. Overall I agree with the main point (that quality
control is easier to deal with when onshoring versus offshoring) but I think
that that's something China can account for and improve on in the relative
short term.

The thing that China CAN'T overcome at least in the short term is both the
cost of shipping and the amount of time shipping takes. As the article
mentions, a shipment of product can take up to 6 weeks whereas products
produced in the US can be shipped within hours of completing production.
There's just not any reasonable way for offshore production companies to
overcome this issue that I can see in the short term and that could drive the
onshoring movement aggressively, especially with the constantly increasing
costs of fuel.

~~~
robryan
I see this is a problem for smaller companies just getting into outsourcing
and for brand new products. There have been examples on here like wakemate
that have had a really hard time getting quality products produced in a
reasonable timeframe.

For bigger companies though with more stable product lines I think this is
much less of an issue. Bringing manufacturing back is working for GE for more
complex and expensive products. I am not sure you will see then bringing back
the basic models of appliances though.

~~~
jeremyjh
Probably not, though if the trend in fuel and energy prices continues that may
come to dominate the equation even for those things. The other thing is
working capital - if it takes 6 weeks to ship and clear customs you will have
a lot of capital tied up and that has an additional cost as well.

~~~
robryan
True, but that is also a competitive advantage to these large companies. They
can afford to have the capital tied up where smaller competitors can't.

------
critium
I have been actually pondering this for software for some time now. I used to
manage a medium sized development team that was concurrently distributed
between the Virginia, Argentina, Ukraine and Pakistan. I've always thought
that the amount of communication overhead due to language/layers and time lag
caused by that actually increased the cost of the product.

For example, during the day, i'd get requirements hand it out to the leads. If
the lead is at PK, then guess what, i'm getting up at 3am to talk to them.
Sending emails wont cut it. He then has to translate to a different language
and hands it out to his devs. Thats several degrees of separation between the
analyst and the dev. I've always believed that what was accomplished could
have taken half that team if they were all local.

I think software development insourcing is ripe for this in the U.S. There is
a large cost of living divide between NY, SF and Missoula, MT and the mid lvl
salaries i've seen here would go a LOT further in those parts of the country
and the time zone and language issues are minimal.

------
batgaijin
They are also applying this to rebuilding their local IT:
[http://gigaom.com/2012/11/29/ge-needs-the-data-analytics-
min...](http://gigaom.com/2012/11/29/ge-needs-the-data-analytics-minds-of-the-
valley-and-knows-it/)

------
temphn
Immelt owns NBC and is on the White House board of economic advisors, so has
the political juice to get waivers and ward off regulation. If you are a
regulator, you will pick an easier target, like Exxon, which doesn't own a
news network. Even granting the things in the article (tighter feedback loop,
higher gas prices for shipping, increased labor productivity), regulation is
not mentioned, so the generalization to other manufacturing companies is
suspect.

~~~
001sky
_Immelt owns NBC_

\--part of * __

------
jaggederest
Manufacturing is converting from blue collar to white collar.

It's more important to be a process developer and a technologist to operate
the machinery and design the assembly process than it is to actually turn a
wrench.

I can only imagine 3d printing and accelerating product cycles will increase
this effect. Dev ops in the real world - the designers and the manufacturers
become the same people and the result is 'autonomation' to use the toyota
term.

------
jarek
So what kind of tax benefits did GE get for moving production to Kentucky?

------
xweb
It's interesting to consider the change to insourcing manufacturing in light
of the more recent trend of outsourcing (or, probably more accurately,
globalizing) white-collar jobs. Although you wouldn't get the same benefits in
terms of saving shipping costs, the other benefits of the article seem like
they still would apply.

At a large corporation I worked at a few years ago, there was an ongoing push
to offshore jobs to an internal group in the same company. We were encouraged
to use this group by our chain of command despite the fact that previous
efforts at outsourcing in our own group had failed disastrously. So it would
be good to see the public discourse swing back toward the benefits of
insourcing so that managers have more ammunition to fight for what works.

------
teyc
There was a passing mention of union dynamics in all this. Without
outsourcing, a lot of the improvements could never have been brought on board.

------
senthilnayagam
Redesigning the product, reducing effort needed to build it is all good , but
eventually this will go offshore one way or another

The only way is constant innovation and engineering , but if people don't go
for STEM education , only lowly paid assembly job and sales job would be left
here

------
MarkMc
Well written article - it grabs your attention with a curious story and
doesn't let go. In my experience quality of articles in The Atlantic is up
there with The New York Times or The Economist.

------
tobyjsullivan
I wonder if this is more a result of exceptionally high unemployment rates
making locally-sourced assembly line production practical once again...

