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Sending manufacturing overseas is not the easy road

Article By Michael Hiltzik

LA Times, Business Section, February 8, 2012

One firm forced by economic pressures to move much of its work abroad finds it cheaper overall but at the expense of manufacturing efficiency and management time.

lat article

Jerry Rosenstein, president of Pioneer Magnetics in Santa Monica, said ensuring manufacturing operations sent overseas run smoothly requires hands-on oversight. “The key is that we have very close relationships with our suppliers," he said. "I go to China often.... You cannot imagine the overhead in support time.” (Francine Orr, Los Angeles Times / February 2, 2012)

Manufacturing products overseas is an easy way to save money, right?

Jerry Rosenstein would beg to differ.

Rosenstein's Santa Monica company, Pioneer Magnetics, makes power supplies, which are boxlike units filled with circuitry and components that convert and control electricity for use in computers and high-tech systems. Found in virtually every industry requiring reliable electronics, such as personal computers, control systems for petroleum refineries, broadcast stations, and telecommunications networks, these devices can convert AC electricity from utility lines into DC power to run a machine, control voltage, even watch out for electrical problems and take steps to protect against damage.

They're the sort of products that are ubiquitous, designed to deliver faultless performance 24 hours a day, and made by a company you've probably never heard of.

Companies like Pioneer are the bedrock of American manufacturing. They're small — the privately owned Pioneer records $15 million to 20 million a year in revenue — and provide stable employment. But they're struggling. Nevertheless, they're barely on the government's radar screen, beyond the lip service paid to our valiant small businesses you hear from politicians at campaign time.

Despite its role as a crucial supplier to other manufacturers, Pioneer finds itself constantly being squeezed between its customers and its suppliers, with global economics delivering an additional few tons per square inch of ruthless pressure.

Rosenstein says economic realities have forced him to outsource most of Pioneer's manufacturing. But he describes the process as something of a mixed curse — it saves money overall, but at the expense of manufacturing efficiency and management time.

"Every start-up manufacturing program in China costs tens of thousands of dollars," Rosenstein told me during a recent tour of Pioneer's 40,000-square-foot complex not far from the 10 Freeway. "To do a very simple program — it's $50,000 just to start. And that doesn't include when you have to fly material to China because of lead times and fly things back from China. It doesn't always go by boat."

Then there's the premium in management support: "If they have a technical problem, they may not know how to solve it." And overseas contractors often demand a higher volume of orders than a specialty manufacturer with its eye on quality can provide. "I have to twist their arm to do 1,000 units a year — they want to do 1,000 a month," he says.

Rosenstein says Pioneer has managed to avoid the pitfalls of offshore manufacturing, such as missed deadlines and poor quality. But that requires hands-on oversight.

"Our experience has been excellent," he says. "The key is that we have very close relationships with our suppliers. I go to China often. I send our product manager, our manufacturing engineer over, just to make sure everybody's together. You cannot imagine the overhead in support time."

Pioneer once employed 650 people; now its Santa Monica workforce is down to 125, supported by about 300 overseas. On the factory floor, I saw four or five employees engaged in hand-building transformers, a key component of Pioneer's products; there used to be 60. Now only the most sophisticated or highly specified transformers are built in-house. The rest are ordered from places like Mexico or Malaysia.

As he walks me around Pioneer's plant, Rosenstein, a genial man of 67 with four grown children, one of whom (daughter Shira, 32) has followed him into the business, talks about the complexity that a specialty manufacturer must manage.

Pioneer can't turn out mass-produced units because its customers all have different specifications. About 80% of its business is in one-off units — that is, products that might be mostly off-the-shelf, but require some specific tweak. An aerospace manufacturer with a military contract might insist on rugged durability under harsh operational conditions, while a high-volume commodity manufacturer might be satisfied with units that last only a year or two. One corporate customer might be interested in high efficiency no matter the cost (a power supply rated at 1,000 watts might actually deliver as little as 890 watts, or 89% efficiency, with every additional percentage point translated into a higher price). Another might be willing to sacrifice efficiency to obtain a lower price.

The pressure on Rosenstein's profit margins is relentless. A long-term customer that was buying about 1,000 Pioneer units a year for $1,000 each recently insisted on a huge price cut. "If we don't go along, we'll lose $1 million in business, but without any profit," he said. But he also knows that retaining that business could help Pioneer hold its material costs down and keep its workforce busy.

Rosenstein reached out to me last October, after I wrote a column analyzing Republican and Democratic economic plans. His gloss on the topic, as laid out in an article he had written for a trade magazine, was that an advanced technical research program for manufacturers — similar to a program launched by the Pentagon in the Sputnik era — would be a useful component of a government economic stimulus plan. It would support longer-range technical development of the sort that gets cut back in economic slumps, help manufacturers increase their technical staff, upgrade America's worldwide competitiveness and feed into the hiring of production and support staff later on.

He's correct that this is precisely an area where government involvement could pay dividends. Long-range thinking is what drives progress. At Pioneer, he wrote, a long-range design team is developing products that are "super-efficient, smaller, less costly" and well-suited to "more environmentally friendly or alternative energy programs — solar, wind, battery, hydrogen and so forth." But it's such long-range technical research programs that get put on the chopping block in tough times. With "the right kind of backing," he suggested, companies like Pioneer could maintain those efforts.

Rosenstein's model is the Pentagon's Advanced Research Projects Agency, ARPA, which was created in response to the Sputnik flight in 1957 and funded long-range research that led to, among other developments, the Internet. Why not a MARPA, a Manufacturing Advanced Projects Research Agency, to counter the threat to domestic manufacturing from overseas?

Pioneer was founded in 1957 by Rosenstein's father, Allen, 91, an emeritus professor of engineering at UCLA. After graduating from college, Jerry joined the company to help out with some manufacturing issues. It was supposed to be a temporary gig but turned into a career. "Within six months I had 60 people reporting to me," he told me, "and I never left."

The company he runs today has long been a family affair, and not just his family. "Half the people here are related, one way or another," he says, adding with a smile, "We support nepotism. We've sometimes had three generations of a family working here." That's vested the workforce with plenty of stability.

Still, there's no escaping the pitiless facts of the international labor market. The average wage of Pioneer's manufacturing workers is about $18 an hour, Rosenstein says, including benefits. (Pioneer offers health coverage, though Rosenstein says the cost has been rising for ever-narrowing benefits.) Pioneer has done some manufacturing in Mexico for 35 years, and moved into China about a decade ago. Taking into consideration all expenses, the manufacturing cost of an item in China or Mexico might be from 10% to 25% that of the U.S. That differential will cover a lot of logistical downside.

"Unless the government does something to make us more competitive, it's just going to get worse," Rosenstein says. "China will learn how to make more complex products." Pioneer, undoubtedly like many of its peers in manufacturing, faces an increasingly urgent question. "What kind of company do we want to be? Do we want to be a production company that keeps people busy? Or do we want to survive? If a customer says, 'We need this at this price,' we may not have a choice."

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