Wal-Mart Stores Inc’s worldwide quest for a lower-cost sleeping bag has led to a one-story factory in northwest Alabama, where Chris Defoor has a new job.
The same forces that have sent thousands of American jobs overseas are now giving a lift to places like Haleyville, a town of 4,200 where Defoor is in his fourth month working at Exxel Outdoors Inc.
With costs in Alabama running 3 per cent below those in China, Exxel is cutting production at a joint venture in Shanghai while hiring workers, adding machines and increasing output at the 250,000 square-foot plant. This year, for the first time, the company will make more bags in the US than abroad.
“We’d been losing the battle to China but had a feeling things were going to change,” founder and chief executive officer Harry Kazazian said. “Call it a calculated gamble or hindsight, it’s working for us.”
The increase in production at Haleyville comes as manufacturing in the US contracts at the fastest pace since 2001, during the last recession. Record exports that had supported output now are slowing as a growing number of countries grapple with the credit crisis.
Meanwhile, Wal-Mart, the world’s largest retailer, saw its sales rise in September and is forecasting a third-quarter profit.
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The Bentonville, Arkansas-based company is “gaining more people who are looking to save money by shopping there”, Exxel's Kazazian said. “That's one of the reasons why we think we'll do well” as a supplier.
Rising Revenue: Kazazian's strategy is a result of the dollar's 17 per cent drop against the yuan since 2005, rising wages in China and a jump in freight rates. He projects his company's revenue will rise as much as 20 per cent this year to $42 million from $35 million in 2007, helped by the Wal-Mart order last December for Disney-themed kids' sleeping bags.
The need to cut costs means manufacturers large and small “are revisiting their outsourcing policy”, said Norbert Ore, chairman of the manufacturing-survey committee at the Institute for Supply Management in Tempe, Arizona.
Ikea, the world’s largest home-furnishings company, opened its first US factory in May. Caterpillar Inc., the world's largest maker of earth-moving equipment, and Home Depot Inc, the biggest home-improvement retailer, plan to produce or buy more goods in the US.
Returning Jobs: Such moves are “a positive for employment and certainly a plus for manufacturing, because those are the kind of jobs that would return,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.
On a recent Wednesday morning, Defoor, 21, is busy maneuvering a forklift to take boxes of sleeping bags to three Wal-Mart trucks lined up at the loading dock.
Exxel, he says, is “one of the only places around here that’s hiring”. It's also the last major maker of sleeping bags in the US out of a half-dozen in the business when Kazazian, 46, started the company in 1996, the CEO says. Most had moved overseas by the time he began production in 2000 at the Haleyville factory, which Exxel acquired from sporting- goods maker Brunswick Corp.
With US retailers increasingly buying from lower-cost overseas suppliers, the company struggled to keep the plant open while shipping in most of its bags from Shanghai.
Eroding Advantage: In 2005, China’s cost advantage began to erode, Kazazian said. As the yuan appreciated, Exxel had to pay more in dollars for materials such as recycled polyester for insulation. In the first half of 2008, wages in urban China jumped 18 per cent from a year earlier, and new minimum-wage and overtime rules will add more to his costs.
Last year, 60 per cent of Exxel's bags were made in Shanghai, while Haleyville produced the rest. By 2009, only a third will come from China, and by 2010, Haleyville will account for 90 per cent, Kazazian said.
While sleeping bags are three-fourths of its business, Exxel also makes tents and ski vests that are still cheaper to produce in China. Even so, “every product we make is up for study now”, he said.
“China's outsized competitive advantage was bound to normalize,” said Cliff Waldman, economist at the Manufacturers Alliance/MAPI, a trade group in Arlington, Virginia. “The gold rush of China is slowing down a bit.”
Quick Delivery: Increasing output in the US made even more sense with the order from Wal-Mart, Exxel's biggest customer. The company can deliver a bag within three days from its Haleyville plant, while shipping one from China might take as long as two months.
“Labour is China's advantage and our weakest link,” Kazazian said. “But they can't compete with me on my just-in- time” production cycle. Customers pay as much as 10 per cent more to get deliveries as needed rather than incurring expenses to store inventory, he said.
“In the United States — and in other markets — we purchase locally whenever we can,” said Wal-Mart spokeswoman Tara Raddohl.
Exxel expanded its Haleyville workforce by 20 per cent this year to 70 employees and will enlarge it another 20 per cent by 2010. In July, the factory added a third production line to boost output to as many as 2.1 million bags this year from 1.2 million in 2007.
“Now that we've become more competitive, more people are looking at us” as a supplier, said Barbara Garrison, vice president of operations, who oversees the plant. “We're getting more inquiries.”
The pickup in work has reassured Winnie Bennett, who was dressed in a purple jumpsuit as she packed scraps of lining into a box. “You've got to have faith,” said the 71-year-old “floater”, who moves around to help as needed. She’s spent 21 years in the factory and wants to work there “for many more”, she said.