What does it take to convince a manufacturer to locate a plant in the U.S.? How about in California, one of the most highly regulated and difficult states in which to operate? (It ranked 40th in CNBC's latest survey of "America's Top States for Business.") What about the San Francisco Bay Area, with its prohibitive cost of living, high population density and even more onerous regulatory environment? 

Amazingly, some companies have found it possible to make products in the Bay Area, and even thrive in the process.

Take American Giant, an e-tailer of men's sweatshirts and other casual wear made exclusively in the U.S. Or, more specifically, in the city of Brisbane, just south of San Francisco, where the company's contract manufacturer has a plant. American Giant believes it can assert tighter control over quality and availability by locating production close to consumers, as well as to its San Francisco headquarters.

Or how about something more technologically complex? Intuitive Surgical is a manufacturer of highly sophisticated surgical robots. With an installed base of more than 1,900 academic and community hospitals, it shipped more than 430 units in 2011, and is on pace to surpass that number this year. The systems are made right in Silicon Valley, where the company has easy access to the technology, engineers and other experts on whom it depends.

Of all companies choosing to manufacture in the Bay Area, perhaps the one with the highest profile in recent years is Tesla Motors, the improbable start-up devoted to the sale of sleek-looking electric vehicles. As I related in a previous post, Tesla's original plan was to outsource and offshore production of both components and finished cars. But numerous glitches in its supplier relations convinced the company to come home to its roots in Silicon Valley. In 2010, it bought the former Fremont, Calif. plant of New United Motor Manufacturing Inc. (NUMMI), a joint venture of Toyota and General Motors.

Mike Taylor, Tesla's vice president of finance, said the decision to assemble the new Model S sedan in Fremont was based on multiple factors, including the prior existence of a physical plant (Tesla picked up the facility for just $2m), government incentives and an efficient logistics model. The site includes a full stamping facility and five-story building for parts, although Tesla still must draw on a base of around 200 suppliers from around the world. Thanks to environmental restrictions, battery cells are still produced overseas, Taylor said at a recent panel discussion of the San Francisco Roundtable of the Council of Supply Chain Management Professionals.

Taylor said Tesla has benefited greatly from its proximity to the assembly operation. On at least one occasion, its Palo Alto-based vice president of engineering had to remain at the Fremont plant, just over 16 miles away, to iron out a problem on the assembly line. "But he could go home each night to see his kids, rather than getting on a plane," he said.

Panel moderator Mike Cassidy, business columnist for the San Jose Mercury News, asked the key question: "Why would rational businesses operate in California and Silicon Valley?"

Rich Thompson, managing director of supply chain and logistics solutions with commercial real estate firm Jones Lang LaSalle, admitted that the decision is a difficult one. "California from a manufacturing perspective is not the place for site selection," he said. But certain factors common to the Bay Area - a spirit of innovation, pool of skilled workers and high-quality infrastructure - can at times offset the state's economic disadvantages.

According to Taylor, there were plenty of locally based autoworkers with the skills and desire to work at Tesla. "There's a huge passion [among them]," he said. "They love making vehicles in the Bay Area. A lot of guys were familiar with the equipment that was there."

The equipment, that is, that Tesla chose to keep. Taylor said the automaker had to rip out many of the older machines, some of which dated back to the 1960s, when General Motors first opened the plant. On the plus side, there's plenty of room for Tesla to grow in Fremont. Currently it's using just over a third of the 5-million-square-foot facility, and expects to be producing there for at least the next five years. Low overhead helps to offset the relatively high labor rates that the company must pay, even though the operation is non-union.

Good infrastructure is critical to Tesla, especially when it comes to receiving components in a timely fashion. Taylor said the U.S. system of roads and other logistics resources is far superior to that of India and even China, when one ventures beyond the latter's coastal regions. "If you don't get that part on time," he said, "you don't build a car."

George Horvath, vice president of real estate and site operations with Hitachi Global Storage Technologies, said his company faces a number of challenges that arise from its proximity to the dense residential community of San Jose, including noise, odors and the presence of hazardous materials at the factory. Not to mention the fact that the HGST facility sits atop an earthquake fault.

On the other hand, the company has access to relatively cheap energy, which accounts for half of its global costs. What's more, said Horvath, it owns the land and buildings in San Jose outright.

Horvath said local authorities are working to revive domestic manufacturing. "They understand this is not a cheap state to do business in." But when it comes to accessing resources such as research and development expertise, "the primary driver is here in the Valley."

Still, there's only so much a city and even a state can do, to draw manufacturing back from China and other cheap offshore locations. Factors beyond their control include tariffs, exchange rates and the price of fuel. "All of that is going to have an impact on the supply chain," Horvath said.

A handful of success stories isn't necessarily proof of a larger trend toward the return of manufacturing to areas once considered off limits due to cost, labor, regulatory and environmental issues. At the same time, there's no doubt that companies are successfully producing in places like the Bay Area, especially for complex, high-value goods.

"It's a question that supply-chain practitioners grapple with every day," Thompson said. "There's a constant challenge of balancing cost and service."

- Robert J. Bowman, SupplyChainBrain

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