In the wake of the coronavirus pandemic and rising overseas production costs, many American companies are thinking about returning at least some manufacturing to the United States. But XStream Trucking Inc. has wasted no time in doing just that.
Born in the San Francisco Bay Area, XStream is a design and engineering firm that sells fuel-saving hardware for commercial trucks. Its flagship product is TruckWings, hinged panels that seal the gap between tractor and trailer, and which deploy at speeds of greater than 50 miles per hour to cut down on drag, improving fuel economy by around 5%. When the truck slows down, the panels fold in.
Engineering of the device began in 2015, with extensive research and development required, notes chief executive officer Daniel Burrows. When actual manufacturing commenced, it took place in garages in the Bay Area and Phoenix, Arizona.
Soon, production scaled to the point where XStream began offshoring in China, Taiwan, and Mexico, following the lead set by so many other American manufacturers seeking cheaper labor and materials. Now, however, the company is leading the move back to the U.S., to the point where is has already onshored 60% of its production requirements domestically.
The move offshore made sense at the time. In 2018 and 2019, Burrows says, unemployment was so low that “we couldn’t actually hire people in America.” It had gotten to the point where the company would waive requirements for drug testing and 10-grade math skills just to get individuals into the plant.
Even before the pandemic hit, reminding U.S. companies of the fragility of long supply lines in China and elsewhere, change was in the air. Chinese manufacturing wages were on the rise, and turnover in the plants was distressingly high.
Then there was the trade war that broke out between the U.S. and China, resulting in the threat, and sometimes reality, of high tariffs on many imports. The actual picture seemed to change weekly, as tariff hikes were announced, postponed, then suddenly put into place.
“We were scrambling to figure out what it meant,” says Burrows of the on-and-off tariff war. XStream would be caught with containers on the ocean at the moment a tariff was announced, resulting in a substantial drop in profitability. For a small company, lacking the time and resources to deal with the complexity of geopolitics, it was “a hammer blow.” Nor could it predict how the dispute would play out in the months and years ahead, making it impossible to build a secure and reliable supply chain.
The coronavirus only served to underscore the problems that XStream was having with offshore manufacturing. The company had a certain edge over many other businesses caught in the pandemic, given that the industry it was serving — commercial transportation — was considered “mission-critical.” But it was still vexed by varying levels of inventory between, say, the U.S. and Mexico.
“The Ohio plant might be up and running, but the Mexico plant would have a different policy and not be able to fulfill our customer,” Burrows recalls. “There was a mismatch of public policy issues, and we didn’t have a ton of inventory built up.”
XStream knew the decision on where to put manufacturing was more than a matter of comparing labor costs, even if the wage gap between China and the U.S. was narrowing. It needed to look at the total bill of materials cost, including shipping, operational complexities, and the risk of business interruption. (Again, the ever-shifting tariff landscape was making that last consideration ever more critical.)
Finally, there was the growing complexity of XStream’s own supply chain, which necessitated narrowing the physical distance between producer and customer. The heavy and bulky TruckWings panels require specialized tubing and aluminum-formed mounts that have to be laser-cut and formed, along with wire harnesses that are made from scratch, ultrasound sensors, an electronics box, and pneumatic system, all of which must be sourced from multiple specialty manufacturers. In addition to the two providers in Ohio, XStream works with suppliers in Pennsylvania and Phoenix, then assembles many of the units at a site in North Carolina.
Automation is key to many manufacturers’ ability to operate plants in the U.S., reducing their reliance on human labor. Burrows says XStream’s plans rely on a mixture of advanced machinery and people, in both high- and low-skill jobs.
By relocating much of its production to the U.S., XStream reduced order lead times and total costs, and at least partially insulated itself against shocks to the system caused by tariffs and the coronavirus. But just a couple of years ago, such a move wouldn’t have been possible.
“Frankly, [American] suppliers are a little bit hungrier for the work today,” says Burrows. “In 2018 and 2019, a lot of them couldn’t hire enough people for the work they had.”
As for whether XStream intends to maintain or even increase its dependence on domestic production, Burrows says the company has no long-term strategy toward that end. “It will depend on relationships with our individual suppliers,” he says. “It wasn’t like I said to my supply-chain manager, ‘We’ve got to onshore.’ It just made sense over time. American manufacturers produced a better combination of price, lead time and quality.”
Next: How the pandemic is affecting global sourcing strategies.
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