What are the real prospects for bringing factory jobs home from abroad?

Published Sunday, Feb. 03, 2013 in the California Forum section of the Sacramento Bee

January is usually an altogether dreary time to be in London. But it was in that month 160 years ago that an inventive American named Samuel Colt, a genuine Connecticut Yankee, opened a factory in the capital of Queen Victoria's empire to manufacture his signature product, a sidearm then in great demand worldwide.

Two years earlier at the Great Exhibition of 1851 in London's Hyde Park, Colt had astonished audiences by demonstrating how he could do something even British industry was unable to do: employ machines to mass-produce the components of his revolvers to standards so exacting that the parts could be interchanged between weapons.

In 1853 he was back to supply firearms to the British military, then bracing for war the Crimean against imperial Russia.

While Colt's London armory would be shuttered four years later, after the British had imported American machinery and managers to compete with him, it nonetheless represents a significant milestone in U.S. industrial history. For it was among the earliest cases of an American company gaining a competitive foothold in an overseas market by manufacturing abroad rather than exporting from its U.S. factories.

Colt's venture is relevant today because it brings a much-needed perspective to a recent series of studies that, having supposedly recalculated the cost advantages of manufacturing in China and other developing countries, contends that making things in America especially things for American consumers now makes good sense.

What began as an exercise by business analysts in rubbing a very small number of anecdotes together in hopes of igniting the latest "Next New Thing" has lately gained traction in the popular media and now threatens to have a disruptive impact on public policy.

As a pair of articles in the December issue of the Atlantic magazine as well as a recent lengthy commentary in the Economist concluded, because Made-in-America is becoming an increasingly viable proposition, U.S. companies that had previously outsourced, or offshored, factory jobs to other countries will soon begin repatriating thousands of those jobs to America.

But does this mean the United States is poised to see a manufacturing renaissance, as a much-touted report from the Boston Consulting Group predicts will happen later this decade? More to the point, how likely is it that American multinational corporations will close factories overseas and come home?

The answer, in no small part, lies in understanding why these companies went abroad in the first place. And this is where the example of Samuel Colt's gun factory in London and later generations of American manufacturers who set up shop overseas is worth recalling.

Americans built factories abroad in 1800s

The second half of the 19th century saw the emergence and remarkably swift growth in the United States and in Europe of middle-class consumer demand, particularly for inexpensive but reliable goods.

American manufacturers of that era had a critical edge over their foreign rivals. To produce larger and larger volumes of goods in a country whose workforce remained predominantly agrarian, U.S. manufacturers such as Colt had been impelled early on to substitute machines for manpower. Moreover, unlike existing goods-producing firms across the Atlantic, the newer U.S. firms were far less constrained by traditional production methods and were thus freer to innovate.

Yet even with the use of labor-saving machinery to produce goods that were increasingly regarded as superior to those being made in Europe, major hurdles remained in supplying foreign markets with products shipped from U.S. factories. Transportation costs were excessive, and governments overseas often sought to protect domestic industry by imposing high tariffs and other barriers to imported goods.

Even more importantly, differences in language and culture generally required that manufacturers adapt their products to each market's distinctive tastes and preferences. What sold in Peoria and Portland often flopped in Paris and Prague.

Historians of the era's cross-border industrial development such as Mira Wilkins and John H. Dunning describe an evolutionary pattern in which fledgling multinationals on both sides of the Atlantic progressed from exporting their products, to licensing their technologies to foreign partners, to ultimately investing in the establishment of their own factories abroad.

Isaac Merritt Singer, who had founded a sewing machine company in 1851, tried the first option by selling his French patent rights in 1855 to a French merchant in exchange for royalties. Singer's company subsequently changed strategy and built its first overseas plant in 1867 in Glasgow, Scotland.

That facility quickly became the world's largest sewing machine factory. By 1879, Singer was selling more sewing machines abroad than at home in the United States.

To meet surging European demand, Singer soon built plants in Germany and Austria and, by 1901, had established one near Moscow.

Singer didn't just manufacture abroad. The company sold directly to customers through networks of stores and sales agents, who also serviced the machines they sold. For example, the company in 1914 employed 27,000 Russians to manufacture, market and service its products in that country. Unhappily, Singer's Russian assets were seized in 1918 by the new Bolshevik government.

Colt and Singer were not alone. Pittsburgh Reduction Co., later renamed Alcoa, set up an aluminum plant in France in 1891.

Westinghouse built a manufacturing plant in Manchester, England, in 1899 and, by the outbreak of World War I in 1914, had factories in France, Germany, Russia and Canada.

Henry Ford was manufacturing cars in England by 1911, and within three years the Model T was the best-selling car in England. By then, Ford also had an assembly plant in France. By the end of the 1920s, Ford was making cars in Europe, Latin America, and even Japan.

Cars need parts and accessories. So Goodyear, among other subsidiary elements of the American automobile industry, moved abroad, building tire factories in Australia, Britain, Argentina, Brazil and Sweden between 1929 and 1938.

The trend was not limited to machinery. During the interwar period, such stalwarts of the U.S. pantry as Quaker Oats, Kellogg, Heinz, Carnation, Pet Milk, Kraft and even Wrigley all set up foreign production facilities, albeit usually in other English-speaking countries.

By 1939, Coca-Cola was being bottled and sold in 70 countries.

Foreign sales topped $5.2 trillion in 2010

The lesson here is not simply that American corporations have been manufacturing goods abroad for much longer than is generally appreciated. It is that their reasons for doing so have typically involved much more than merely sourcing goods wherever labor is cheapest and where government regulators aren't terribly fussy about air and water quality, or workplace safety standards.

With 95 percent of the world's population residing outside the borders of the United States and with the ranks of middle-class consumers expanding at unprecedented rates throughout the developing world, U.S. companies continue to have powerful incentives to adapt their products to local preferences in multiple overseas markets.

And that is just what American companies continue to do. Sales by the overseas subsidiaries of U.S. corporations exceeded $5.2 trillion in 2010, a year in which direct exports of goods and services from the United States totaled a more modest $1.8 trillion. Yet only about 9 percent of the sales made by these subsidiaries involved American customers. Sixty percent were made to residents of the country in which the affiliates operate and 30 percent to customers in other countries.

If there is some compelling reason why these corporations should instead opt to meet global market demand with products exported from America, it is far from evident. Let's not even get into the well-attested desire of U.S. companies to limit their exposure to U.S. tax rates.

Even in the case of Apple, which designs products of almost universal appeal, the Cupertino-based company's recent decision to begin producing a limited number of computers in the United States appears to driven more by its public relations department than its accountants. Apple long ago ceded its manufacturing expertise in order to concentrate on product design and marketing. And the same factories in China that make iPhones and iPads for American consumers also supply Apple's customers everywhere else in the world.

But even if Apple and other U.S. firms chose to manufacture more of their products here, it does not necessarily follow that large numbers of blue-collar factory jobs would be created. American companies began substituting machines and technology for manpower back in the 19th century, and they've gotten steadily better at it ever since. Indeed, manufacturing in America remains a highly profitable and productive endeavor in all measures except employment.

To be sure, there are U.S. companies such as GE and Otis Elevator that have lately opted to move some manufacturing activity back to this country. The numbers are few, however, and the economic impact thus far has been negligible.

What is regrettable is the belief that more and more American companies will be persuaded by (dubious) economics to re-establish manufacturing operations on U.S. soil, giving life to an unfounded sense of hope that re-shoring will reverse a decades-long decline in U.S. factory jobs, including a precipitous 37 percent drop in manufacturing sector employment in California since 1990.

What's worse is that policymakers, persuaded that re-shoring jobs will be the deus ex machina that will rescue America's middle class from its downward spiral, will now attend to other priorities.

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