Farouk Systems makes professional hair care products – marketing everything from shampoos to curling irons under its CHI brand. For years, the company did most of its manufacturing in China and South Korea.
But in 2009, the company made a radical move. Here’s Governor Rick Perry at the formal announcement.
“Right here in Houston, Texas, where CHI already employs hundreds of Texans, they are now adding 1,000 manufacturing jobs that were previously located in Asia.”
Farouk Systems said the company was spending $500,000 a month to fight counterfeiting of its products in China. Many manufacturers have long considered that an acceptable tradeoff for doing business in a country where labor is far cheaper than in the U.S.
Except it’s not so cheap anymore. Harold Sirkin is a senior partner with the Boston Consulting Group.
“In 2001, average wages in China were about $0.58 an hour. But the laws of supply and demand continue to hold, and what we’ve seen taking place is wage increases of somewhere on the order of 15%-20% per year.”
Labor is only part of the cost of Chinese-made product. There’s also the little matter of shipping that product across the Pacific. The leap in oil prices over the past decade has made that trip a lot more expensive.
Add in the low cost of domestic natural gas, which many U.S. manufacturers use either as a fuel or a component of their products, and what might have been radical in 2009 looks a lot less so today. Robert Dye is chief economist for Comerica Bank.
“Texas is approaching parity with China in many, many different ways, which is another way of saying that businesses no longer have an incentive to offshore their production. They’re coming back, particularly energy intensive businesses that are able to take advantage of these very, very cheap energy prices that we have.”
That’s putting Texas on the cutting edge of a new trend. Instead of offshoring, companies are “reshoring,” bringing jobs back to the U.S. that had previously moved overseas. And some firms from other countries are choosing the U.S. over China when offshoring their own production.
Take Toshiba International. The company’s northwest Houston factory turns out motors for everything from industrial mining equipment to Ford hybrid cars. Toshiba has expanded the facility several times in recent years. It now employs more than 1,500 workers in the Houston area. Kurt LeDoux is an assistant manager at the plant.
“China is always an option for many manufacturers, but with high-tech, it’s not always the best solution. And so far, we’ve been able to be quite cost effective building here in the U.S.”
The Boston Consulting Group estimates that, by the end of the decade, the U.S. will gain 2.5 to 5 million new jobs tied to the revival of American manufacturing.