More U.S. businesses abandon outsourcing overseas

KNOXVILLE, Tenn. — The story of Bailey Hydropower Private Limited might sound like that of many U.S. manufacturers, except it happened in India — one of the world's top destinations for offshore operations.

Bailey Hydropower was a 100,000-square-foot manufacturing plant in Chennai, India, producing hydraulic cylinders. Anticipating costs savings from an overseas operation, parent-company Bailey International built the plant in India in 2000 from the ground up to meet its own specifications and fitted it with the latest equipment.

The plant was a major part of Bailey's operation, producing cylinders in 1,000 different sizes and manufacturing five of the company's flagship cylinder models.

But in October 2009, Bailey sold the plant and started returning production to Knoxville, Tenn.

Bailey joined the emerging trend of re-shoring — companies bringing back overseas operations because the expected cost savings in less expensive countries didn't happen.

"A lot of businesses are trapped in the allure of offshoring, but my experience has been that there are more to the costs than what you are quoted," said Kevin Bailey, one of Bailey International's owners. "I think so often we are quoted cheap prices overseas and we don't realize there are hidden costs."

The cost savings in countries like India and China have been shrinking because labor and transportation expenses there are on the increase. But there are other costs as well, Bailey said.

"There is a totally different set of laws, different culture, a different work ethic and even a moral culture that is different," he said.

Customs taken for granted in the United States often don't apply overseas. For example, an American considers the bargaining over once an agreement is signed, but Bailey said there is a saying in Asia that "the negotiations begin after the contract is signed."

U.S. firms find that Asian companies will sign most any agreement because they expect to bargain for what they want later, he said.

"As Americans, we hold a lot of value to structure and written agreements," he said. "In their way of thinking, they are more interested in the relationship they have with you. They put a very high value on the relationship."

Much business for Bailey is producing cylinders for customers on short notice, and having to depend on long supply and transportation chains worked against that fast productivity.

"When we had the factory in India, it was virtually impossible to accommodate an urgent request and turn things around on short notice when you had five weeks that the product was going to be on the water before it reached you," Bailey said.

Bailey and other U.S. companies started finding that improvements in manufacturing processes now make it more economically feasible to make some items in the United States that were being produced overseas.

These developments combined to persuade Bailey to reverse course on offshore operations.

"There are lots of different factors as to why, but we have seen the costs in those places go up, and we are finding that with some of the manufacturing-technology improvements we have been able to make here that it is more cost-competitive to assemble cylinders here than it is to assemble them in India or China," Bailey said.

Re-shoring has been gaining traction nationally. In one example, the Wrigley Co. announced in July it was moving production of its Life Savers mints from Canada to its Chattanooga, Tenn., facility and creating 40 to 50 jobs there.

Matt Murray, associate director of the University of Tennessee Center for Business and Economic Research, said re-shoring is a developing trend across the country.

Companies may have moved production overseas chasing the lure of cheap labor. "But there is more to doing business than finding the cheapest place for labor costs," Murray said.

A business might find electrical-power production is unreliable in other countries and outages interrupt production. It might find the company manufacturing its products also is turning out copies to sell at lower prices.

Harry Moser, an Illinois manufacturing-company executive, spearheaded the country's first re-shoring fair last spring in Irvine, Calif.

Sponsored by the National Tooling & Machining Association and the Precision Metalforming Association, it was a chance for manufacturing shops to meet with original equipment manufacturers to land contracts. It drew representatives from 45 large manufacturers and 113 manufacturing shops.

"It was kind of like speed dating," Moser said. "The big companies came in with the work they wanted to place, either offshore or in the states, and shops met with them for 10 minutes at a time."

About 64 percent of the original equipment manufacturers brought work to the fair that they had been doing offshore, Moser said.