Kambiz Mahdi gambled when he returned to Irvine-based electronic components maker Probe Manufacturing Inc.
He also bet on Orange County as a manufacturing center.
It wasn’t the first time Mahdi had high hopes for Probe, a company he cofounded and served as chief executive while it grew to $9 million in annual sales and went public in 2006.
That was before Mahdi left the company in 2005 over a falling-out with his partner. Probe’s sales dropped to $2 million by 2009, and the company veered toward bankruptcy before the board of directors wooed him back in a last-ditch bid for a turnaround.
“I decided to give it 90 days,” he said.
Probe is now up to $5 million in sales, debt free and counts 40 workers at its 23,000-square-foot factory on Gillette Avenue. Mahdi projects an 80% increase in sales this year—and he plans to fill those orders with components made here.
“I could comfortably say that 20% to 30% of our forecast in 2012 is due to manufacturing returning to the U.S.,” Mahdi said. “There is not much advantage anymore to being in the lower-cost regions. Places like China and Malaysia used to offer 30% discounts. But the last 10 years, fuel costs, currency and labor costs have all gone up. That cancels out 10%.”
Another 10% is nixed by traveling and managing relationships with overseas employees and vendors, according to Mahdi. Other expenses such as quality-control problems can eat up more.
“Numbers don’t make sense anymore,” Mahdi said.
“Onshoring”
Probe is an example of the small- and mid-sized manufacturers driving the “onshoring” trend. Local operations are penciling out if they get close to costs overseas, helped by the benefits of quick turns and closer contact with customers.
“There are a lot more manufacturers doing stuff you wouldn’t think of—industrial machinery and tools, a lot of high-tech and high-end machines,” said Bart Aslin, chief executive officer of Dearborn, Mich.-based Society of Manufacturing Engineers Education Foundation. “There are a lot of them based in Anaheim, Placentia and Costa Mesa. It’s not like the 50,000-people factories. It’s the smaller companies making things.”
Aslin said the spread of manufacturers in OC is a lot like the landscape nationwide.
“About 80% of manufacturing in the country is done by smaller shops with fewer than 50 workers,” he said. “Those are the backbone of advanced manufacturing in this country.”
The Society of Manufacturing Engineers has 2,000 OC members and runs local education programs from a Newport Beach office.
Onshoring is “definitely a trend I’m seeing in Orange County,” said Kathy Looman, the group’s West Coast industry relations manager.
Rick Dawson, chief executive of Foothill Ranch-based Bal Seal Engineering Inc., which makes seals and springs, recently joined the trend.
Dawson ran float valves maker Robert Manufacturing Co. in Rancho Cucamonga in the early 2000s.
“We were getting over $10 million worth of products out of China,” he said. “The cost differentials were about 100% back around 2004. But by 2007, I was seeing price differentials of about 20% at best.”
Long lead times and other costs chipped away at any savings, he said.
Dawson kept those lessons in mind last year, when he took the top job at Bal Seal, which has 480 employees here.
“We decided we’re not going to do that,” he said, referring to his experience at Robert Manufacturing. “We keep our work in the U.S. We’re actually able to ship products from here into the Chinese market.”
Cost Escalating
Rising costs for labor and shipping aren’t the only factors in shifts to domestic manufacturing. Others include “the necessity for face-to-face interaction on highly engineered products [and] the desire to protect intellectual property,” said Dale Balough, president of injection molding company JG Plastics Group LLC in Costa Mesa.
JG Plastics serves the medical, aerospace, military and electronics industries. It has 60 employees at a 40,000-square-foot facility and has recently increased the amount of production it does in Costa Mesa.
“We are seeing a slight uptick in business due to customers relocating business previously manufactured in China,” Balough said. “This is more of a trickle than a flood but still an encouraging sign.”
San Juan Capistrano-based Seychelle Environmental Technologies Inc. is another company seeing gradual increases in the amount of production done here.
It has about 30 employees and makes portable water filtration bottles and pumps to treat water from various sources. About 75% of its products are made here, and the rest in China, Chief Executive Carl Palmer said.
“We have been reducing our offshore manufacturing by about 5% per month,” Palmer said. “China is costing us too much delay in backorder production. And when we have the demand, we end up air-freighting the parts, which really drives our cost up.”
The company reported $4.1 million in sales for the first nine months of the fiscal year ended November, up 29% from a year earlier.
Cost Steady
Overhead has been steady, Palmer said, thanks in part to fewer quality control problems.
“Maybe some of the problems are the language or different forms of misunderstanding,” Palmer said. “Now that we have moved some of our plastic molds back here, our costs are about the same.”
The changing cost structure of manufacturing overseas hits more than manufacturers.
“It’s definitely had an impact on us, too,” said Myk Lum, owner of industrial design firm Lum Design Associates LLC in Irvine.
The company designs various products for clients, including Buena Park-based Yamaha Corp. and Northridge-based audio electronics company JBL Professional.
“We’re the upfront work,” Lum said. “Whatever we design, it goes to manufacturing. We’re designing and trying to meet a price point. If the manufacturing costs are higher, we can no longer introduce interesting materials or keep things lower in cost.”
Lum said the firm has had fewer headaches with companies that manufacture here, thanks to easier communication and quality control.
The onshoring trend has grown to the point where many manufacturers now have trouble finding qualified workers, a gap that persists despite historically high levels of unemployment here and nationwide.
151,600 Jobs Here
There are about 151,600 manufacturing jobs in Orange County, accounting for about 11% of the entire local workforce. The number of job openings in manufacturing is difficult to pin down, but a poll by New York-based accounting and consulting firm Deloitte LLP in October found there were 600,000 skilled manufacturing positions unfilled nationwide.
“People’s image of manufacturing is outdated: big factories, dirty, dangerous,” Aslin said. “But today’s modern shops are different and call for specifically and highly trained workers.”
The foundation has provided more than $5 million in scholarships for technical training since 1998.
Graduates can’t come soon enough for Costa Mesa-based optical components maker Precision Optical.
“There is not enough experienced personnel that are in the industry,” Sales Manager Paul Dimeck said.
The company plans to partner with the University of Arizona’s College of Optical Sciences to provide internships to students.
