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Why we left our factories in China

June 29, 2011: 10:33 AM ET

Fed up with the poor quality of having their products made in China, American businesses like Sleek Audio are moving production back home.

By Sheridan Prasso, contributing editor

FORTUNE -- When Mark Krywko and his son, Jason, launched Sleek Audio, a small business making in-ear headphones for iPods and other audio devices from a Florida town near St. Petersburg, they asked several U.S. manufacturers for quotes on how much it would cost to make their product. It was, of course, oh so much cheaper in China, so they contracted with a factory in Guangdong province and launched their first product in 2007.

But last year, fed up with low quality, too much travel, communications problems, shipping delays, rising costs, and -- worst of all -- a ruined shipment of 10,000 sets of earphones that cost millions and nearly brought the company to its knees, the father-and-son team made a big business decision: quit China and move their manufacturing back to the U.S. "It became very difficult and taxing on us," says Jason. "Now we control the quality of the product. No more waiting for production has been a wonderful thing."

Sleek Audio is part of a trend called reshoring, in which primarily small businesses decide that China is a hassle and that they want to bring their operations closer to home, where the recession has lowered costs, created workers eager for jobs, and made it easier to justify U.S. manufacturing. Reports have emerged from California, Texas and all across the country as small businesses -- and even large ones like GE (GE) and Caterpillar (CAT) -- take advantage of local incentives and move back at least some of their manufacturing operations for products sold in the U.S. market.

Sleek Audio's costs are about 15% to 20% higher because of the move back, but the company's redesign of earphones that replaced a formerly Chinese-made plastic component with U.S.-made high-end aluminum, titanium and special carbon fiber, resulted in a higher quality product that justifies the price. It not only gets a "Made in USA" label, but Sleek Audio's redesign of the SA7 earphone won a 2011 Best of Innovation award from the 2011 Consumer Electronics Association. "Even though there's a tremendous cost savings when you go to China, in the end it really isn't that much," says Mark. "It's the hidden costs -- the delays, the shipping costs, you pick all that up on a learning curve.

When Sleek Audio got off the ground in 2005, they first found that U.S. manufacturers were quoting prices of $19 or $20 for one particular component that the Chinese were offering to make for $2. But when the Krywkos decided to quit China last year and asked around again about making the part the U.S., this time the answer was $8. A box that used to be quoted for $4 to $5 in the U.S. before was quoted at $3 now. And the Krywkos found a defense contractor doing industrial design that they hadn't known existed before, just a 10- to 15-minute drive down the road. "The economy has allowed us to get better deals. Now that we're aware and we know the pricing, we can say, 'You can't charge us this much.' But companies now realize that if they want to be competitive, they have to lower their prices here and work on quantity."

A big part of the problem in China is that small companies cannot afford to have someone there full-time to oversee their operations. That means they have to travel, or stay up until 2 a.m. to talk to people on the phone in China over even minor problems, says Mark. Small companies often get their production runs squeezed in between larger orders, meaning that they can get short shrift. "Great care would be used to satisfy us when we were there," says Mark. Adds Jason: "We'd go there and they would do it perfectly, but when we'd say go ahead and make 10,000 to 20,000 pieces, that's when the differences would happen."

Now, with manufacturing to their specifications done just down the road, the Krywkos have much more control. And they estimate that their orders from various U.S. companies now support 100 jobs. They haven't been able to make everything here -- in fact, a particular type of Rosewood can't be found in the U.S. But while 35% of their components are still made in China, they plan to have 80% back here by the end of this year. "Our long-term goal is 90% to 95% of everything we make made here in the U.S.," says Jason. "We've been getting thank you emails for bringing it back to the U.S. It feels very good."

Read more from this Fortune.com special report:

Made (again) in the USA: The return of American manufacturing
Lost in a sea of troubling economic data is one bright spot: America is once again competing for -- and winning -- factories and manufacturing operations.

The secret role of energy in bringing U.S. jobs back
How a reliable grid can trump cheap wages

Investors pile into the bet against China
Manufacturing jobs are leaving China and returning to the U.S. But many investors are betting that that may actually be the least of China's problems.

How to train U.S. workers back into manufacturing jobs  
Despite gloomy job prospects, many American manufacturers are on the prowl for top talent, but say that not enough workers are trained for the tasks.

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