Question

Identify hidden cost

Identify a sunk cost trap

Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013. Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States. And Appliance Park already has new plastics-manufacturing facilities to make parts for these appliances, including simple items like the plastic-coated wire racks that go in the dishwashers.

In the midst of this revival, Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is “quickly becoming mostly outdated as a business model for GE Appliances.” Just four years after he tried to sell Appliance Park, believing it to be a relic of an era GE had transcended, he’s spending some $800 million to bring the place back to life. “I don’t do that because I run a charity,” he said at a public event in September. “I do that because I think we can do it here and make more money.”

Immelt hasn’t just changed course; he’s pirouetted.

What has happened? Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn’t manufacture much besides a fast-food hamburger in the United States. Now the CEO of America’s leading industrial manufacturing company says it’s not Appliance Park that’s obsolete—it’s offshoring that is.

Why does it suddenly make irresistible business sense to build not just dishwashers in Appliance Park, but dishwasher racks as well?

In the 1960s, as the consumer-product world we now live in was booming, the Harvard economist Raymond Vernon laid out his theory of the life cycle of these products, a theory that predicted with remarkable foresight the global production of goods 20 years later. The U.S. would have an advantage making new, high-value products, Vernon wrote, because of its wealth and technological prowess; it made sense, at first, for engineers, assembly workers, and marketers to work in close proximity—to each other and to consumers—the better to get quick feedback, and to tweak product design and manufacture appropriately. As the market grew, and the product became standardized, production would spread to other rich nations, and competitors would arise. And then, eventually, as the product fully matured, its manufacture would shift from rich countries to low-wage countries. Amidst intensifying competition, cost would become the predominant concern, and because the making and marketing of the product were well understood, there would be little reason to produce it in the U.S. anymore.

Vernon’s theory has been borne out again and again over the years. Amana, for instance, introduced the first countertop microwave—the Radarange, made in Amana, Iowa—in 1967, priced at $495. Today you can buy a microwave at Walmart for $49 (the equivalent of a $7 price tag on a 1967 microwave)—and almost all the ones you’ll see there, a variety of brands and models, will have been shipped in from someplace where hourly wages have historically been measured in cents rather than dollars.

But beginning in the late 1990s, something happened that seemed to short-circuit that cycle. Low-wage Chinese workers had by then flooded the global marketplace. (Even as recently as 2000, a typical Chinese factory worker made 52 cents an hour. You could hire 20 or 30 workers overseas for what one cost in Appliance Park.) And advances in communications and information technology, along with continuing trade liberalization, convinced many companies that they could skip to the last part of Vernon’s cycle immediately: globalized production, it appeared, had become “seamless.” There was no reason design and marketing could not take place in one country while production, from the start, happened half a world away.

You can see this shift in America’s jobs data. Manufacturing jobs peaked in 1979 at 19.6 million. They drifted down slowly for the next 20 years—over that span, the impact of offshoring and the steady adoption of labor-saving technologies was nearly offset by rising demand and the continual introduction of new goods made in America. But since 2000, these jobs have fallen precipitously. The country lost factory jobs seven times faster between 2000 and 2010 than it did between 1980 and 2000.

Until very recently, this trend looked inexorable—and the significance of the much-vaunted increase in manufacturing jobs since the depths of the recession seemed easy to dismiss. Only 500,000 factory jobs were created between their low, in January 2010, and September 2012—a tiny fraction of the almost 6 million that were lost in the aughts. And much of that increase, at first blush, might appear to be nothing more than the natural (but ultimately limited) return of some of the jobs lost in the recession itself.

Yet what’s happening at GE, and elsewhere in American manufacturing, tells a different and more optimistic story—one that suggests the curvature of Vernon’s product cycle may be changing once again, this time in a way that might benefit U.S. industry, and the U.S. economy, quite substantially in the years to come.

The GeoSpring water heater—the one that just came home to Louisville from China—looks a little like R2‑D2, the Star Wars robot, although taller and slimmer. It has a long gray body, and a short top section—the brains—in gray or bright red, with a touch-pad control panel.

Answer 1

Sunk cost trap.

1. The addition of $800 is an example of sunk cost where instead of selling the facility, it was held on to as well as new investments were made.

Hidden cost

2. The new assembly lines would have hidden costs like, shrinkage since it involves products, insurance, wages, and bonuses for the employees that have been employed in the new product assembly line, training and development of employees, administrative costs, legal licenses, to name a few.

answered by: anonymous