Appliance Maker Drops China to Produce in Texas

(by Timothy Aeppel, WSJ.com) HOUSTON — Farouk Shami, a Palestinian-born hairdresser who built a $1 billion manufacturing company around a popular line of hair irons, is moving all of his production of hand-held appliances from China to a sprawling new factory here.

The move flies in the face of conventional wisdom, which says gadgets like this are best made in a low-cost country. But, he says, outsourcing has led to a loss of control over manufacturing and distribution.

“We’ll make more money this way — because we’ll have better quality and a better image,” says the 66-year-old, who says his company, Farouk Systems Inc., spends about $500,000 a month fighting counterfeits, most of which he says originate in China. The company collects the fake products and tracks the source, and then brings action in China to shut down illegal producers.
Farouk Shami talked with workers in early August on the floor of his new manufacuturing facility in Houston.

Mr. Shami figures having production under his nose will help him control quality and inventory, and also fight the fakes, since imported irons will automatically be suspect. He sells in 104 countries, but the U.S. represents over 60% of the company’s sales.

“I think you’re starting to see more manufacturers rethinking outsourcing,” says Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public policy and research group based in Arlington, Va., calling a June speech by General Electric Co. CEO Jeffrey Immelt, where he said that overseas outsourcing had gone too far and that U.S. companies needed to expand domestic production, a “bellwether of what’s happening in manufacturing.”

Besides GE’s efforts to manufacture more within the U.S., other companies such as St. Louis-based electrical-equipment maker Emerson has shifted some production of items such as appliance motors from Asia to Mexico and the U.S., in part to be closer to customers in North America.

Many U.S. producers got hurt when the recession hit and they were left holding large backlogs of goods ordered from overseas. Producing closer to customers — and limiting the inventory in the pipeline — is one solution, says Mr. Meckstroth.

It remains to be seen whether Mr. Shami can produce cost-effectively in the U.S. The company is using automation to reduce the number of workers needed to assemble its tools and is redesigning products to make them easier — and therefore cheaper — to snap together.

Mr. Shami says the Houston-made hair irons will cost about $2.50 more to produce than the China-made irons; he plans to absorb the cost without raising the retail price.

He says some costs will fall as large-scale production gets under way. One Texas supplier of plastic parts initially charged four times the cost of the Chinese supplier, but cut the price to near parity once it became clear that orders would be large and steady, he says.

The move is creating jobs in Houston at a time when factory jobs are evaporating in most places. On a recent afternoon, job applicants sat in the lobby of a cavernous new factory, hoping to be one of 30 people hired daily. The company expects to have 1,200 workers when the factory is at full speed in December.

Mr. Shami, who loves the color red — he has 40 pairs of red boots, which he sometimes wears with red leather pants — invented his hair iron, called the “Chi,” in the late 1990s. He was already a manufacturer, having earlier developed ammonia-free hair color after he discovered he was allergic to that chemical.

As a hairdresser, he knew that existing irons used metal heating elements that could damage hair. His innovation was to use ceramic plates to generate a gentler heat. The name Chi stands for “ceramic hair iron.”

Even though he priced it three times higher than most existing irons, it was a success. The company initially invested in manufacturing in South Korea, and, when demand exceeded that operation, outsourced to China. The company says it makes 60% of its revenue from the Chi line, which now includes hair dryers and other hair tools.

But a growing wave of counterfeits has driven down prices and created a dilemma for Farouk Systems, which often finds that defective Chis returned to the company for refunds are actually knock-offs. Authentic Chis carry price tags of $130 to $170, while fakes available on the Internet sell for as little as $50. The company hasn’t quantified the number of fake products.

“You close one (counterfeit-making factory) down, and it just opens up across the street the next day,” says Bobbi Mihal, the company’s in-house lawyer.

The issue has strained relations with the company’s Chinese supplier, Shenzhen-based Fenda Electrical Co. The Chinese firm is helping Farouk Systems set up its Houston factory and continues producing Chis as the new operation gets up to speed. But when Mr. Shami sent 16 engineers to China early last year to study their production, Fenda wouldn’t let the visitors into some parts of the factory.

Ellen Wu, a vice president for Fenda, says her company, which makes hair products for a variety of Western firms, only produces authorized products.

“Copies are a serious problem” for Farouk Systems, she says. “We’ve helped them stop some companies.” She says her company is phasing out its own production of Chis and remains on good terms with Farouk Systems.

Mr. Shami made the decision to move production to the U.S. two years ago, he says. He already had a factory in Houston, where he lives, producing hair coloring and shampoos. The first lines, where the starting pay for assemblers is $8 an hour, are now making seven of the company’s 72 hair tools.

Meanwhile, other manufacturers are also making similar versions of hair tools with ceramic technology — Mr. Shami says he didn’t patent the innovation because his experience in patenting his hair color took years.

But he says the company can compete by continuing to innovate, such as by adding electronic controls that turn an iron off automatically if it’s accidentally left on. He says new models and innovations will command a premium.

Write to Timothy Aeppel at timothy.aeppel@wsj.com.

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