WSJ: Otis Shifts Work Closer to Home

For Immediate Release:

October 4, 2011

Contact:

By Timothy Aeppel
Wall Street Journal

The U.S. manufacturer, whose elevators zip up and down structures as diverse as the Empire State Building and the Eiffel Tower, is moving production from its factory in Nogales, Mexico, to a new plant in South Carolina.

More startling: Otis says the move will save it money.

What's happening at Otis is part of a broader shift in the way manufacturers tally costs.
Their outlook has been changing as the cost of producing abroad has risen and they have devised more efficient ways to make things close to where they want to sell them.

International companies ranging from Ford Motor Co. to General Electric Co. have started returning to the U.S. some jobs that they had previously shipped offshore, a process sometimes dubbed as "reshoring."

"It's a trickle, it's not a trend—but clearly companies are now thinking more about it," says Scott Paul, executive director of the Alliance for American Manufacturing, a nonprofit alliance of business and labor groups that lobbies for domestic production.

A number of forces are behind the modest influx. Wages and other costs are going up in foreign countries—especially China—while pay in many industrial sectors inside the U.S. has risen slowly or even fallen in many cases. Transportation costs have grown, as have the costs of holding large stocks of inventory, a common precaution when producing goods far from their end market.

Companies also recognize how moving jobs to the U.S. at a time of high unemployment can enhance their image. "A lot of companies still don't publicize plant closures in the U.S.-which they're still doing," says Mr. Paul, while going out of their way to tout moving jobs back into the country. But longer term, he says, there should be genuine gains for the American economy and workers.

Stephen Maurer, the head of the manufacturing practice at consultants AlixPartners LLP, says some things will always be made in low-cost places, like clothes, "because they involve tons of labor."

But for many other goods, the numbers are shifting. In new study, Mr. Maurer found that it's still cheaper to make a long list of basic industrial goods in places like Vietnam, Russia, or Mexico, but the gap has shrunk. Some analysts say this trend is accelerating and will eventually make the U.S. the cheapest place to produce a wider range of goods. Otis thinks that's already the case for its elevators.

When Otis moved production down to Mexico in 1998, "it clearly was for cost-oriented reasons," says Didier Michaud-Daniel, chief executive of the United Technologies Corp. unit. "But since then, logistics costs have increased a lot."

Otis declined to disclose all its cost calculations, but it said the new South Carolina plant will undercut the costs of producing in Mexico.

Among other things, the plant will be closer to many of the company's customers, about 70% of whom are on the East Coast of the U.S.

The company figures that will lower its freight and logistics costs 17.3%.

Another 20% of savings, the company says, will come from "efficiencies" of having all its white-collar workers associated with elevator design and production located at the new factory.

The company, which is based in Farmington, Conn., had only final-assembly operations in Mexico, keeping design and engineering jobs in the U.S.

That meant toolmakers from Dallas and engineers and designers based in Indiana and Arizona had to travel across the border.

"We really needed to rationalize our supply chain, and the way to do that was to have everything in one place," says Mr. Michaud-Daniel.

At the new Florence, S.C., plant, designers and engineers will be close at hand, helping with a planned launch of a new generation of elevator designs.

It also will be easier for customers to visit the plant. Nogales is 65 miles from the nearest U.S. commercial airport, in Tucson, Ariz.

The new factory will have 360 workers, about the same total number as the Nogales facility, though that will include white-collar jobs and fewer factory-floor positions.
The facility will use more automation, including designs developed in Otis's European factories, to reduce the need for production workers, says Mr. Michaud-Daniel.

Many U.S. producers, meanwhile, remain committed to Mexico—in part because they view manufacturing there as a way to keep production close to U.S. customers while still benefiting from cheaper labor.

That's the view of John Heppner, chief executive of Master Lock Co., of Milwaukee.
Citing rising costs in China, the company has moved some production back to the U.S., as well as to its large factory in Nogales—not far from Otis's plant.

"We don't just have a maquiladora in Nogales," says Mr. Heffner, using the term for border plants that do mostly basic assembly work, "but a world-class manufacturing operation."
Indeed, Master Lock's plant in Nogales employs 1,100 and is its largest plant in North America. It also serves as the distribution hub for the western half of the U.S.

Master Lock, like many American companies, moved work to Mexico and China to survive an onslaught of foreign competition over the past decade.

"But a lot of those dynamics have turned," says Mr. Heppner.

For now, he says, Mexico makes sense for a big chunk of his company's production.