As costs rise, factories bring production home

Shipping expenses make overseas work less desirable

By Timothy Aeppel, The Wall Street Journal

Published June 13, 2008 at 10:35 p.m.

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The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

"My cost of getting a shipping container here from China just keeps going up - and I don't see any end in sight," said Claude Hayes, president of the retail heating division at DESA LLC.

He said that cost has jumped about 15 percent, to about $5,300, since January and is set to increase again next month to $5,600.

The privately held company, known for making the heaters that warm football players on the sidelines, recently moved most of its production back to Bowling Green, Ky., from China. Hayes said the company was lucky to have held onto its manufacturing machinery.

"What looked like an albatross a year and a half ago," he said, "today looks like a pretty good asset."

The movement of factories to low-cost countries further and further away has been a bittersweet three-decade-long story for the U.S. economy, knocking workers out of good-paying manufacturing jobs even as it drove down the price of goods for consumers. But, after exploding over the past 10 years, that march has been slowing.

The cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel, says Jeff Rubin, chief economist at CIBC World Markets in Toronto. He estimates transportation costs are now the equivalent of a 9 percent tariff on goods coming into U.S. ports, compared with the equivalent of only 3 percent when oil was selling for $20 a barrel in 2000.

"In a world of triple-digit oil prices, distance costs money," Rubin wrote in a recent report.

He figures that for every 10 percent increase in the distance of a trip, energy costs rise 4.5 percent.

Transportation costs are just part of a larger wave of inflation sweeping global manufacturing, which also has been pounded by higher costs for basic materials, such as steel and resins.

The cost of doing business in China, in particular, has grown steadily as workers there demand higher wages and the government enforces tougher environmental and other controls. China's currency also has appreciated against the dollar - although not as much as some critics contend it should - increasing the cost of its products in the U.S.

Edward Zaninelli, vice president of trans-Pacific westbound trade at Orient Overseas Container Lines in San Ramon, Calif., a major shipping line, said he's heard from customers who are moving production back to the U.S., including a maker of steel pans for car engines.

"I believe a decent amount of production could come back into the States within five years, not everything," he says. "But it won't be because of transport costs - it'll be because other production costs have gone up and companies have realized they can have better control over their production when it's closer to home."

For many manufacturers, though, oil prices that have hurtled past $130 a barrel have been the tipping point. Emerson, the St. Louis- based maker of electrical equipment, recently shifted some production from Asia to Mexico and the U.S., in part to offset rising transportation costs by being closer to customers in North America.

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