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Why Is It So Hard To Make A 100 Percent American Hand Dryer?
Originally published on Tue February 5, 2013 8:17 pm
Fifteen years ago, Denis Gagnon bought a company that made a product nobody really liked: hand dryers. But he quickly managed to turn Massachusetts-based Excel Dryer into an innovator with the Xlerator — a high-speed dryer that cut drying time from more than 30 seconds to less than 15.
The Xlerator, assembled at a plant in East Longmeadow, is "Made in USA Certified" — meaning at least 75 percent of the product is made of U.S. content. The foundries that cast most of its metal components are American, and the control boards are assembled locally. Excel polishes and electroplates the dryer covers in-house, and, in teams of four, builds the components into a working dryer.
Today, Excel Dryer has 12 times the sales revenue it had in its pre-Xlerator days. It's kept 38 manufacturing jobs in the U.S. through some creative research and development, including a shop of retired MIT scientists who have invented things like an emergency flashlight, an automated shower and even a putter with an enlarged sweet spot.
So why is the motor inside the Xlerator — part of that remaining 25 percent — not made in the U.S.? Why does it come from a company in Hong Kong?
"What we need to do to be cost effective is to source a motor that's used in more than one industry, and then tailor-make a couple adjustments to make it fit our product," Gagnon tells All Things Considered host Robert Siegel. "That's the only way we can cost effectively do it."
Johnson Electric: American Name, Asian Company
The company that makes the Xlerator's motor, Johnson Electric, has a very American-sounding name and an office in Shelton, Conn. But it's very much an Asian company that's traded on the Hong Kong Stock Exchange. And in the world of small motors, it is a big, big player.
According to Johnson Electric's website, the company makes motors for kitchen appliances, hair dryers, toothbrushes, power tools, printers, DVD players, copiers and vending machines. For cars, the company makes door locks, mirrors, wipers, washers, brakes, radiator fans and fuel pumps.
Gagnon employs 38 people on his factory floor. In contrast, Johnson Electric's 2012 annual report says the company's "global headcount including contract employees is approximately 38,000 people."
As a small business, Gagnon says his best deal was getting Johnson Electric to adapt one of its many motors to the Xlerator's specs.
"Tooling up a special motor for Xlerator, when we didn't know if we even had a product, was kinda out of the question at the time," Gagnon says. "We settled in on a high-volume motor that they could make some adaptations to. And frankly, that turned out to be good decision."
East Asia, A Small-Motor Powerhouse
Johnson Electric is one of two major players in nonindustrial motors, along with a Japan-based company, says Alex Chausovsky, who follows motors for the market intelligence firm IHS.
Almost all the small motors in virtually every motor-powered consumer product come from the region, he says — from the vibration motors in cellphones to hair dryers and microwaves.
Johnson Electric and its major competitor, Japan's Mabuchi, can keep their products inexpensive in large part because of economies of scale. Both companies, Chausovsky says, "make in excess of a million motors per day."
Low labor costs in Asia are also a critical factor, Chausovsky says, although they're not as low as they were five or 10 years ago. And as those costs have grown — particularly in China — this type of manufacturing has begun to spread to places like Mexico, Poland and the Czech Republic.
"But the fact that many years ago labor costs were significantly lower allowed them to establish those economies of scale," he says — meaning it still makes sense for the bulk of small-motor manufacturing to continue in Asia, at least for now.
Back at Excel Dryer, Gagnon says whatever greater savings his company might enjoy by manufacturing the entire Xlerator overseas, it's not a choice he's willing to make.
"[It will] never happen on my watch. I've expanded this facility twice; I have no intention of ever relocating the manufacturing offshore," he says. "We'll be smart enough to make it here in the United States."
AUDIE CORNISH, HOST:
It's ALL THINGS CONSIDERED from NPR News. I'm Audie Cornish.
ROBERT SIEGEL, HOST:
And I'm Robert Siegel.
Yesterday, we met Denis Gagnon, who bought the hand dryer company, Excel, about 15 years ago and turned it into a hand drying pioneer. Under his leadership, the company came out with the Xlerator.
(SOUNDBITE OF A HAND DRYER)
SIEGEL: It's a high-speed dry air hand dryer that cut the time it takes to dry your hands from over 30 seconds to under 15.
(SOUNDBITE OF A HAND DRYER)
SIEGEL: It's assembled at a plant in East Longmeadow, Massachusetts. And the fact that it's made in the USA certified - meaning at least 75 percent of it is U.S. content - is important to Denis Gagnon. The foundries that cast most of its components are American. The control boards are assembled locally. They polish the covers and do their own electroplating in-house.
DENIS GAGNON: So there - oh, there you go. You see?
SIEGEL: The blue copper sulfate coming off of it, right?
SIEGEL: And in teams of four, they build the components into a working dryer.
(SOUNDBITE OF MACHINERY)
SIEGEL: Today, Excel sales are 12 times what they were before the company started making the Xlerator. So here's the question raised by Denis Gagnon's real-life success story of how his entrepreneurship kept nearly 40 manufacturing jobs in this country through some very creative R&D, including a shop of retired MIT scientists, who turned from cutting edge questions to inventing things like an emergency flashlight, an automated shower, a system for self-dosing sun block and even a putter with an enlarged sweet spot.
Why? Why is the motor inside the Xlerator, at the heart of its operation, part of the 25 percent that is not made in the U.S.? Why does it come from a company in Hong Kong? I asked Dennis Gagnon.
GAGNON: What we need to do to be cost effective is to source a motor that's used in more than one industry and then tailor-make a couple of adjustments to make it fit our product. That's the only way we can cost effectively do it.
SIEGEL: And that's just the way life is. I mean, obviously, it's important to you, in describing the company, to say these components are made in the United States.
GAGNON: We're very proud to say that.
SIEGEL: Obviously proud of that. But it still checks out that when it comes time to buy the motor, the right motor is made in Hong Kong.
SIEGEL: The company that makes the Xlerator's motor has a very American-sounding name - Johnson Electric - and it has an office in Shelton, Connecticut. But it is very much an Asian company that's traded on the Hong Kong Stock Exchange. And in the world of small motors, it is a big, big player. According to Johnson Electric's website, the company makes motors for kitchen appliances, hair dryers, toothbrushes, power tools, printers, DVD players, copiers and vending machines. For cars, they make door locks, mirrors, wipers, washers, brakes, radiator fans and fuel pumps.
Dennis Gagnon employs 38 people on the factory floor. According to the 2012 annual report, Johnson Electric's global headcount, including contract employees, is approximately 38,000 people. With a small business, Denis Gagnon's best deal was getting Johnson Electric to adapt one of its many motors to meet the Xlerator's specs.
GAGNON: Tooling up a special motor for Xlerator when we didn't know if we even had a product was kind of out of the question at the time, and we settled in on a high-volume motor that they could make adaptations to. And frankly, that turned out to be a very, very good decision.
SIEGEL: OK, let's look at the other extreme. You know, you're very proudly a made-in-America company, but what if, say, labor costs and some infrastructure checked out to move much of what you do here to China instead? Can you imagine the bottom line saying, we'd make more?
GAGNON: Not my attitude, never happen on my watch. I've expanded this facility twice. I have no intention of ever relocating the manufacturing offshore. We'll be smart enough to make it here in the United States.
SIEGEL: So what is it about Johnson Electric of Hong Kong? Well, Alex Chausovsky follows motors and mechanical power transmission for the market intelligence firm IHS. How important a company, how big a company is this Johnson Electric?
ALEX CHAUSOVSKY: Johnson Electric is a - one of the two major players in the non-industrial motors market. Besides Johnson Electric, one of the major suppliers is Mabuchi, which is located in Japan. But I would say most of the motors used in consumer appliances - power tools, electronics, anything purchased by the consumer - are typically manufactured in Asia.
SIEGEL: Why? Why is it that, say, a small motor should logically be made in Asia?
CHAUSOVSKY: I think the main reason why it's manufactured in Asia is the pure economies of scale and low cost of production that that region continues to offer. These companies, Johnson Electric and Mabuchi, both make an excess of a million motors per day. And as a result, they can really capitalize on economies of scale, allowing them to keep the selling prices of these motors as low as possible.
SIEGEL: So there just aren't that many companies that are making that many things that have motors in them to be able to manufacture a motor on their own.
CHAUSOVSKY: Well, that's exactly right. There are many companies that manufacture the actual end equipment: the microwaves, hairdryers, cell phone, the little vibration motors that are located in each device or the motors that's been your computer hard disk drive. Most of that equipment is also manufactured in Asia, and so it makes perfect sense that the demand will be driving local production of those components.
SIEGEL: How important is the difference in labor cost in East Asia and the United States in determining that this business should have relocated there?
CHAUSOVSKY: Well, I think labor cost is certainly a critical factor. They are less critical today than they were five or 10 years ago. But the fact that many years ago labor costs were significantly lower allowed them to establish those economies of scale, which continued to make sense to manufacture those products in that region.
SIEGEL: Well, is the lesson there that if manufacturing jobs go overseas and the manufacturers overseas are smart, there's not much chance of them coming back here?
CHAUSOVSKY: I think, to an extent, yes, although over the last few years, we certainly have seen a trend to bring back the manufacturing to more local sources. As the competitive advantage of the Chinese labor costs has been eroded away, it makes more sense for companies to manufacture in places like Mexico, for example, to serve the U.S. and Canadian markets, places like Poland or Czech Republic to serve German, French and Spanish markets.
Even within Asia, you've seen a substantial shift from China to other developing countries - Vietnam, Malaysia, Indonesia - because the labor costs there have not seen nearly the dramatic rises that have been witnessed in China.
SIEGEL: Well, Alex Chausovsky of IHS, thanks for talking with us about this.
CHAUSOVSKY: Absolutely. Thanks for having me.
SIEGEL: By the way, we wondered why is a company founded in Hong Kong called Johnson Electric. According to a 1988 article in Forbes Magazine, the founder, Wang Seng Liang, was originally from Shanghai. Then he went to Hong Kong, and before motors, his business there was textiles. His chain of tailors was called Make an Inch which, as demonstrated by Google Translate, is, in Mandarin...
UNIDENTIFIED WOMAN: (Foreign language spoken).
SIEGEL: ...which Mr. Wang transliterated to an English name that sounded close to...
UNIDENTIFIED WOMAN: (Foreign language spoken).
SIEGEL: Johnson. Transcript provided by NPR, Copyright NPR.