WHEN Louisville, Kentucky-based GE Appliances rolled out production of its latest hybrid hot water heater last February, the event was viewed as a milestone in the recovery of US manufacturing.

It wasn't just because GE seemed to be making a sizable bet on the revival of US consumer demand during uncertain times. Through 2014, the company will spend about US$1 billion to revitalize its US appliance production, creating 1,300 new jobs in the states of Kentucky, Alabama, Georgia and Indiana.

More significant for global supply chain specialists, GE's new lines of appliances - including high-tech refrigerators and washing machines - will replace the less advanced models that GE had been producing in China and Mexico.

At a time when the word "outsourcing" has become synonymous with "unpatriotic" for some American voters, how many manufacturers are likely to follow in GE's footsteps? Why are firms placing a huge bet on what some analysts are now calling "re-shoring"?

Hal Sirkin, senior partner and managing director of the Boston Consulting Group, forecasts that during this decade, two million to three million manufacturing jobs will come back to the US "because of the fundamental shift in economics between China and the United States." In all, this process will provide US$100 billion in added economic growth to the US over the decade, he predicts.

Fueling the process, according to Sirkin, will be the rapidly declining divide between Chinese manufacturing wages and those in the US. In 2000, US wages were almost 22 times higher than those in China, but by 2015, wages in the US will be only four times higher.

Complicated calculations

Not everyone is convinced.

Marshall L. Fisher, professor of operations and information management at Wharton, says that sort of argument "grossly oversimplifies the global supply chain" by focusing too much on wage rates.

According to Fisher, between 1999 and 2009, China's competitiveness against the US continued to be largely based on labor cost arbitrage, but Chinese wages have long been rising at a more rapid pace than those in the US.

During the last 20 years, Chinese wages have grown five- to six-fold, while US wages have grown by about only 50 percent. Although that has narrowed China's wage advantage, wages in China's Pearl Delta assembly complex are still only about 12 percent of US manufacturing wages.

Over the past several years, an increasing number of US and other global manufacturers have been moving their outsourcing into lower-wage Asian locations, such as inland China, Vietnam, Indonesia and Cambodia, where wages may average about 6 percent of those in the US.

Nevertheless, comparative labor costs are only one of several considerations involved in choosing whether or not to outsource production, says Fisher.

Other factors involved in such a "complicated process," he notes, include transportation and logistics costs; costs incurred from holding the extra inventory needed to guarantee against supply chain risks; longer lead times for developing new products overseas; and the challenge of managing quality control and product development from a distance of several thousand miles.

While he agrees that the tipping point has moved in favor of the United States, "it is very product-specific," says Fisher. For example, Converse Shoe now makes its line of "distressed shoes" - which have holes in them - in the US in order to meet the special complexities of managing quality control.

Although many low-end apparel and footwear products are sourced from Asia, New Balance, American Apparel and Timbuktu also make some of their products in the US, although they source some products offshore.

Unlike standard brands of athletic shoes, these are higher-margin, lower-volume products that benefit from a strong corporate brand and a made-in-the-USA label, in a consumer segment where that label really counts.

Re-shoring may also make particular sense for bulky goods, which naturally incur higher transportation costs - including appliances, as in the case of GE.

Overlooked fact

While GE's experience may fuel the argument for those who want to see jobs return to the US, Fisher notes that one fact is often overlooked in the re-shoring debate: the nature of the jobs themselves.

Many of the jobs that have gone offshore, such as positions in sewing apparel or steel mill work, are bottom-rung positions that few American workers would accept even if they were available to them. If millions of jobs are brought back to the US, manufacturers would be forced to pay substandard wages acceptable only in developing countries, he adds.

Whether it's off-shoring or re-shoring, Morris Cohen, professor of operations and information management at Wharton and co-director of the Fishman-Davidson Center for Service and Operations Management, says that US-based companies will continue to do what they need to do in order to maximize their profits.

No matter how rapidly Chinese wages or global transportation costs may rise, outsourcing will continue to be a fundamental practice in today's globalized economy.

"This is an emotion-charged issue," notes Cohen. "Much of the discussion that we have seen from both sides, however, is at best over simplified, and in some cases misleading. Statements often have been made that are based on misconceptions and exaggerations in order to score political points."

Although many view outsourcing as unpatriotic, that's hardly the case, according to Cohen. "All firms make sourcing decisions in order to get the best inputs for producing the goods and services that they sell to their customers."

"No firm makes everything, and overall, more than 60 percent of the cost of manufactured goods can be attributed to goods and services that the average firm buys from its suppliers," says Cohen. Recent surveys of major companies have found that about 40 percent of the raw materials, semi-finished and finished product they purchase are sourced from outside of their home market, he adds.

While many Americans complain about the disadvantages of off-shoring - including job losses and plant closings - politicians and consumers often ignore its positive impact on their own purchasing power.

Ultimately, Cohen believes that the correct balance can be struck through careful planning.

"By choosing appropriate policies and decisions, it should be possible to generate 'win-win' solution scenarios where all are better off. Finding such solutions is the challenge facing us today."

Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://bit.ly/Xcxdsg