By Noel Randewich and Alexei Oreskovic
SAN FRANCISCO (Reuters) - When Google Inc decided to build its Nexus Q home entertainment device in Silicon Valley rather than in China, it was not fretting about the bottom line. It was fretting about speed.
"We wanted to innovate fast. This is the first end-to-end hardware product that Google has ever put out," said John Lagerling, Google's senior director of Android global partnerships.
The cost of building the orb-shaped Nexus Q, a cross between a streaming video box like Apple TV and a stereo amplifier, "was not the No. 1 priority," Lagerling said. "We wanted to see if we could do fast (design iterations) rather than having our engineers fly across the world."
"This is not this big initiative that things had to be made in the USA," he said.
Google's decision to go with a local manufacturer is a striking departure from the made-in-China model that Apple Inc and other consumer electronics manufacturers have long considered essential to their competitiveness.
Google's move reflects a nascent trend of "reshoring" manufacturing operations to the United States. While such actions are largely driven by soaring labor costs in China, other benefits of manufacturing locally are shorter lead times, more responsive partners and better protection of intellectual property.
The Nexus Q will also likely sell in limited quantities, which made finding the cheapest possible manufacturer less important. BGC analyst Colin Gillis said Google would probably not sell more than 100,000 of the devices, which he said are pricey compared with products like Apple's set-top box.
MADE IN CHINA, REVISITED
China has become the world's factory floor over the past decade as incentives, low wages and entry into the World Trade Organization made it a highly efficient workshop for everything from shoes to electronics.
An exodus of American manufacturing jobs has created political tension in the United States and put pressure on U.S. companies to at least acknowledge the issue.
In May, Apple Chief Executive Tim Cook said he would like to see more of the company's products assembled in the United States instead of China, but he qualified that by saying there was a shortage of expertise in America in some areas.
Economics and not politics are likely to drive any larger shift in manufacturing, and wages in China could be the biggest factor. Hourly Chinese factory wages, which averaged 52 cents an hour in 2000, are expected to rise to $4.51 an hour by 2015, according to the Boston Consulting Group.
By 2015, the total labor-cost savings on manufacturing many types of goods in China will stand at around 10 to 15 percent.
Hal Sirkin, a senior partner at Boston Consulting, said that once logistics, supply-chain management and transport costs were factored in, the benefit of making things in China will become marginal for more companies, especially those making bulkier or heavy products.
A February survey by Boston Consulting of 106 U.S.-based manufacturing executives whose companies had annual sales greater than $1 billion showed that 37 percent of them were considering or planning on moving production back to the United States from China.
Still, the complex web of component suppliers that are an integral part of the electronics manufacturing process will help keep vendors such as Apple glued to China.
"The supply chain is so geared toward building that product in China that even with the labor rate up, it's hard to reorient that big supply chain and say, 'Oh yeah, we're just going to build the entire thing here in the U.S.'," said IHS iSuppli analyst Thomas Dinges.
Companies facing high shipping costs from China or making goods in small quantities are more likely than major consumer electronics makers to see benefits in returning to the United States.
BENEFITS OF BUILDING LOCALLY
Lagerling declined to say what it was costing Google to make each Nexus Q, but IHS iSuppli analyst Andrew Rassweiler estimated the company was spending $150 on components per item. Rassweiler cautioned that he had not personally examined the product.
Dinges estimated that a high-volume Asian manufacturer might have charged Google about $8 to assemble each device, while a smaller-lot U.S. contract manufacturer might charge double that amount. The device sells for $299.
Lagerling declined to say which contract manufacturer was making the Nexus Q, citing security and confidentiality, but the New York Times reported last week that the manufacturer was near Google's Mountain View, California, headquarters.
Jeff Moss, co-owner of contract manufacturer Quality Circuit Assembly in San Jose, California, said many U.S. companies underestimate the sometimes fuzzy costs of moving their production abroad.
"The problem was people initially just looked at unit cost and not the total cost," Moss said. "You have to take into account your additional lead times, your freight costs, and then the extra hand-holding it takes to deal with a supplier in Asia."
LED lighting maker NeuTex is in the final stages of moving production of its core products to Houston, Texas. The family-owned company manufactured in China for more than four years. Among NeuTex's considerations for making the switch were quality and goods damaged in transportation.
NeuTex will operate the U.S. plant to which it is moving its manufacturing operations. Cofounder John Higgins said that taking into account increased automation at the plant, he now spends about 30 percent more on labor than he did in China. But factoring in shorter shipping time, fewer defects and increasing automation, he expects to bring the overall additional cost of manufacturing in the United States down to about 4 percent.
He believes that demand created by "Made in the USA" on his products will more than offset additional manufacturing costs.
Peerless-AV, which makes wall mounts for TVs, recently moved its manufacturing to Chicago from China because the company grew tired of its designs be illegally copied.
"A lot of the increase in cost of wages has been offset by the money we've saved by having our design group here instead of going back and forth," said Marketing Manager Mike Larmon.
(Editing by Jonathan Weber and Edwin Chan)