The Ups and Downs of Made in the USA
January 30, 2017 Leave a comment
K’Nex, which makes Tinkertoys and Lincoln Logs as well as its eponymous brightly colored building sets, followed the trend of offshoring in the late 1990s, and by the early 2000s had outsourced most of its toymaking to China.
But by the time Araten arrived at the company in 2005, the long lead time required to ship toys to the United States—coupled with high demand only three months out of the year—was becoming a strain on the business. Catering to the changing tastes of 8-year-olds is a dicey proposition, and product decisions made in January could be yesterday’s news nine months later when the ship pulled into port.
With machines idling at K’Nex’s sister company, Rodon, a plastics manufacturer in Pennsylvania, Araten saw an opening to bring the toy production back home. “We were looking to keep our people employed,” he said.
Today, 90% of K’Nex toys are manufactured in the United States. But that shift didn’t happen overnight. Araten and his team quickly learned that U.S. wood manufacturers weren’t set up to make components as small as Tinkertoys or Lincoln Logs.
Thus began a four-year search to find a U.S. manufacturer who could handle the tiny timbers. “We thought it would be a lot easier,” said Araten. “We thought, ‘All right, we’ll go to the furniture makers in North Carolina, and they’ll make Lincoln Logs. How hard could it be? It turns out it was really hard.”
Manufacturers either didn’t have the right equipment or their processes didn’t comply with child safety standards for things like wood stains.
After some dead ends, said Araten, “we danced around and actually my supply chain team said, ‘Hey, we’ve been going to people who make bigger things and trying to make them smaller. What about somebody who makes smaller, things trying to make them bigger?”
A search led them to Pride Manufacturing in Maine, maker of golf tees and cigar tip holders. Pride was willing to make some modifications and add another production line to make the logs.
“It was figuring out, how do you do the staining, how do you do the drying,” said Araten. “How do you get the wood dry at the right time and temperature, and the actual amount of automatic saws that you need, and how many was too many to make at once. At first we were running them through so fast that they would be splintering.”
Doing the Math
Bringing manufacturing back to the United States (or offshoring it here, or keeping it here) is anything but simple. It requires a combination of perseverance, creativity, complex mathematical feats and being at the right place at the right time. Sometimes, the timing is bad, or people haven’t connected, or the supply chain just isn’t there—or it’s not cost-effective now but maybe it will be later.
At a panel discussion at KPMG’s Automotive Executive Forum in January, supply chain executives talked about the calculus of deciding whether to make something in the U.S. or elsewhere.
“It isn’t always about wages,” said Ramzi Hermiz, president and CEO of Shiloh Industries, a supplier of lightweighting materials that does the bulk of its manufacturing and research in the U.S. but has a sprinkling of plants in Mexico, Europe and China. In Mexico, “energy is considerably more expensive than it is in the U.S. And actually for some of our products, energy costs more than the labor that goes into it.”
Another complicating factor is trade agreements that don’t even involve the United States. Mexico, for instance, has negotiated upwards of 40 trade agreements with various countries. Sometimes auto companies will locate in Mexico not because they want to make cars cheaply to ship to the United States, but because of the trade agreements that allow them to avoid high export tariffs to Europe or Brazil or Argentina, said Hermiz.
Still, some manufacturers are finding the United States more attractive than it used to be. The Reshoring Initiative’s Harry Moser said that 2013-2014 was a tipping point, with the U.S. going from losing about 140,000 manufacturing jobs per year to gaining 10,000 or more annually. Advancements in workforce training—while still not on par with Europe’s apprenticeship models—have made a difference. “President Obama did do a good job on skilled workforce, so the availability of toolmakers, precision machinists, welders has gotten better,” said Moser. “It takes years to train them properly, but at least companies are confident that they can find the people they need.”
In addition, increased automation reduces the wage advantage for countries like Mexico and China, even if those countries also automate, said Moser. And the jobs that are automated are usually the lowest level, and the ones with the largest inter-country wage difference. “At the simplest, least skilled level, [Mexico’s wages] might be 10% of ours,” said Moser.
Another advantage: Chinese companies, unlike U.S. ones, must pay a 15% value-added tax in addition to their tariffs on capital equipment purchased from Japan or Europe.
At K’Nex, some highly decorated parts and toy motors are still made overseas. “Our view of the world is to do as much as you can here and try to do more here—and if you can’t get to 100%, because some things are in some cases just impossible to find, that’s OK,” said Araten.
With Amazon searches increasing for “Made in the USA,” the label has inherent value for a toy company like K’Nex, where it might not in less consumer-facing sectors. Araten said costs are higher to make products here, but K’Nex can charge 12% to 15% more for toys because of the USA stamp.