Why Keeping Jobs Local Means Good Business

It's no secret that manufacturing jobs are leaving the United States in search of lower costs and lighter regulation. In fact, according to Bureau of Labor Statistics data, the number of manufacturing jobs in this country has declined from approximately 17 million 10 years ago to just 10 million today.

But it's precisely because of this that we are intrigued by companies that are not only still manufacturing in the United States, but are actually expanding their U.S. manufacturing capacity. These companies are either really stupid or really smart -- and there's an investing angle for us regardless of which proves true.

An example of getting it right
Cabinet maker American Woodmark (NAS: AMWD) , a company that we own in our Great America Fund and that Portfolio Manager Bill Mann and I met with last year in Winchester, Va., is committed to U.S. manufacturing because it believes that having operations here gives it a competitive advantage. Not only can it provide a higher level of service and responsiveness to its customers, but it believes that given rising shipping costs, the advantage of making bulky cabinets in Asia and sending them across the ocean will erode over time. American Woodmark has had to cut costs in its U.S. plants and rationalize its operations in order to remain competitive, but the organization is stronger as a result of its favoring thoughtful, long-term planning over a short-term, cost-cutting bandage.

I found two other companies similarly committed to U.S. manufacturing operations during a recent trip to Ohio -- welding equipment maker Lincoln Electric (NAS: LECO) and engineered bearing manufacturer Timken (NYS: TKR) . Lincoln, which you may know from the book Spark, is a particularly fascinating case given its promise to never lay off a U.S. employee who has more than three years of service

The method to the madness
Like American Woodmark, both Lincoln Electric and Timken believe healthy U.S. manufacturing operations give them a significant advantage over competitors. To further this advantage, Timken recently broke ground on a $225 million expansion of its steel plant outside of Canton, Ohio. And while shipping welding equipment or ball bearings across the ocean isn't necessarily as expensive as shipping wooden cabinets, there are myriad reasons why it makes sense for both firms to keep making things in the United States.

By maintaining its long-tenured U.S. workforce, Lincoln Electric, for example, holds on to thousands of years of collective manufacturing experience. This enables the company to keep costs down at its U.S. plant and accelerate a new product innovation cycle that is responsible for the bulk of the company's recent sales growth.

Timken, on the other hand, has hand to change its business somewhat to stay committed to U.S. manufacturing -- getting out of commodity bearings, diversifying away from automotive applications, and focusing on only highly engineered products -- but it really likes the idea of manufacturing in the place where it will ultimately sell the product. One reason for this is the enhanced ability to service customers and get feedback, but the other is that doing so removes much of the currency risk that can cripple a company's profit in the current volatile environment.

The value of a variant view
The decline in the number of U.S. manufacturing jobs and our country's current unemployment rate are testimony to all of the reasons not to make things in the United States. But there are also a number of very good reasons why some companies should be keeping and growing their U.S. manufacturing operations. That's not always an easy thing to do, but we've been finding more and more that the companies that are able to do it are positioning themselves well to compete globally for the long-term. They are establishing durable competitive advantages such as best-in-class customer service or superior research and development capabilities, rather than reaching for fleeting comparative advantages such as a temporarily reduced labor cost.

As very long-term investors, we certainly prefer the former to the latter because the companies that create the greatest value for investors over time are invariably the ones that have opted to do something very different from their peer group. And deciding to keep jobs in Ohio? Given recent trends, that's certainly something both Lincoln Electric and Timken have decided to do differently from some of their peers.

How to eat and drink well in Ohio
As always, our search for great companies also included a few stops at some fine eating and drinking establishments. If you ever find yourself in Columbus, Ohio, (site of next year's NHL All-Star game) I recommend you stop by Dirty Frank's Hot Dog Palace. Between the friendly service, craft beers on tap, and plethora of hot dog toppings available to please your palate, it's hard to go wrong.

Editor's note: Tim Hanson is not able to engage in discussion on the boards or in the comments section below.Tim does not own stock in any of the companies mentioned here. For more commentary from Tim and the Motley Fool Funds portfolio team,click here.

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