Lego part of reshoring, foreign direct investment growth in US

In 2006, Lego A/S shuttered its U.S. manufacturing plant in Enfield, Conn., moving production to Monterrey, Mexico.

Now, 16 years later, the company is returning production to the U.S., with a new $1 billion facility in Chesterfield County, Va., near Richmond.

Why the new manufacturing strategy? Thank Lego's growing popularity, supply chain issues, plus advanced automation that's making U.S. manufacturing globally competitive.

"The U.S. is a very important market for the Lego Group. We've grown rapidly during the past four years, and we expect to see this demand continue as we increase availability across the country, and attract new builders to Lego play," Chief Operating Officer Carsten Rasmussen said in an email.

Since Billund, Denmark-based Lego closed the Enfield factory, the company's Monterrey plant has been primarily supplying the United States with the colorful ABS toy building bricks.

Now Lego is both expanding in Monterrey and returning production to the U.S., with a carbon-neutral facility that will be powered by a solar farm and employ 1,760.

The 1.7 million-square-foot facility will help the family-owned company, which is celebrating its 90th year in business, meet demand for Lego products as well as goals to manufacture them with greener materials in sustainable factories.

The Virginia factory will be a full-scale Lego facility with molding, decorating, assembly and packing handled on-site and molding tools manufactured internally, primarily in Denmark.

Company officials ruled out constructing a second plant in Mexico to stick with their strategy of building up their regional presence in big markets.

In Europe, Lego has factories in Denmark, Hungary and the Czech Republic. In Asia, Lego has a factory in China and is building one in Vietnam.

The Virginia project continues a trend of reshoring in the form of foreign-direct investment (FDI) — when the parent company is based outside North America — that contributed 80,000 of the 261,000 U.S. jobs reshored in 2021. Projections call for another big year for U.S. reshoring and FDI with the proposed Lego positions among some 400,000 job announcements forecast for 2022.

Lego saw massive gains during the pandemic and again in 2021 with the company's growth outpacing the toy industry. Sales increased by 27 percent to $8.06 billion (55.3 billion Danish krone) in 2021 compared with the prior year.

Founded in 1932, Lego building sets are an internationally beloved toy appealing to a wide age range with Star Wars- and Harry Potter-themed play kits, sets of 1,000-plus pieces for adults 18 and up, botanical collections, mosaic art and more.

"Demand for Lego has been fairly insatiable from U.S. consumers so it makes sense that they will actually be produced here again," James Zahn, deputy editor of The Toy Book, said in a phone interview.

While Lego skews as young as preschool, it really appeals to all ages, including a growing number of older teens, young adults and adults who are kids at heart. They are buying Lego Technic sets with functioning gearboxes, wheels and axles as well as artistic floral and portrait sets from the Lego Art range.

"Lego really zeroed on that market with detailed models and more elaborate lines older kids or adults would feel good about doing," Zahn said. "They were an early adopter of recognizing 'kidults.' You don't have to grow up anymore. It's very therapeutic to sit down and enjoy quiet time building something."

To meet demand from kidults and others, construction of the Virginia facility is set for a 340-acre, project-ready parcel in a county-owned industrial park with suitable zoning, roads and power, water and sewer connections all just waiting for the right business.

Production is expected to begin in the second half of 2025.

"The U.S. is the No. 1 toy market, but China has been running very close and likely will become the No. 1 toy market in the world because there are a lot of families with young kids," Zahn said.

To prepare for those orders, Lego is investing more than $1 billion to build a carbon-neutral factory in Vietnam that will employ about 4,000 people over 15 years.

With a growing middle class, demand from Asia is on track to outstrip supply from its Chinese plant, Lego officials told Reuters.

When the Vietnam plant opens in 2024, it will be Lego's second in Asia and sixth overall.

Lego is expanding plants in China and Europe, too, with the financial forecast calling for growth rates to normalize in 2022 and transition back to single digits.

"Lego has production pretty much around the world. It keeps setting up shop where it can be most efficient. It's about getting closer to the customer," Zahn said.

The goal is to respond quickly to shifts in local consumer demand for hot products, shorten the supply chain and reduce the environmental impact of shipping long distances.

"The toy industry talks about speed to market," Zahn said. "The standard timeline for a toy was 18 months from green light to production to your kid's toy box. Now companies want that done as quickly as possible. We've seen it shrink to three months for certain items and even quicker on other things."

Lego's return to the U.S. doesn't surprise Zahn. He said the financial upside to produce toys outside the country was largely erased during the pandemic.

"It's not just about the toys but the packaging and shipping and now there are other U.S.-specific issues with inflation," Zahn said. "For many reasons, the upside [of offshore manufacturing] has gone away, but I think logistics is the biggest issue."

With the Lego product lines appealing to everyone from preschoolers to adults, and some sets being expensive to ship from overseas or even just across the border, Zahn said building a U.S. plant makes sense.

Al Kaufman agrees. The senior vice president of technical affairs for New York-based Toy Association Inc. said Lego trucks most of its products from Mexico into the U.S. using a free-trade zone, but challenges have occurred.

"There have been delays in getting product across the border and the cost of shipping everything has gone up in the last year," Kaufman said in a phone interview. "The other consideration that probably made it worthwhile economically is the fact that molding bricks can be a highly automated process. There isn't a lot of labor. I've been to the plant in Billund, Denmark, and it's almost entirely automated."

Besides automation, a lot has changed in the 16 years since Lego last produced its bricks — made of ABS for its clutch power, durability and high-gloss colors — in the U.S. The last five years in particular have a presented a series of blows to the toy industry, Zahn said.

"It has been a weird decade for the toy industry in the U.S. because every year there has been some type of unexpected chaos, especially the last five years," Zahn explained.

"In 2018, Toys R Us closed in the U.S. In 2019, there was the U.S.-China trade war and tariff, tariff, tariff was all we heard. Most of them didn't happen, but all the preparation in case it did happen cost folks a lot of money and time. In 2020, it was the COVID-19 pandemic. In 2021, there was a shipping container crisis. And 2022 is all about inflation, the market crashing and the war in Ukraine. A lot of different curveballs have been thrown at the industry," he said.

Russia's invasion of Ukraine on Feb. 24 had big implications for global supply chains already stretched from the pandemic by further increasing costs, prolonging deliveries and adding hurdles to moving goods around the world.

Many companies curtailed operations in Russia beyond the international sanctions, calling the invasion "unprovoked" and citing safety concerns for employees in both countries. Ford, GM, Apple, Disney and Intel are among the 1,200 companies to exit Russia, temporarily halt most or all operations, or suspended sales and services.

Lego had stopped shipments to Russia by early March. Products that were designed for and en route to that big toy market and Ukraine ended up in limbo.

"Where do you unload product in Russian and Ukrainian packaging?" Zahn asked. "You can't just put it with a discounter in a country not friendly with those countries, and you can't bring it to the U.S. for closeout if it's in European packaging."

The war also has added to lingering problems for Lego rival Playmobil, a German line of toys produced by holding company Horst Brandstätter Group. While many of its competitors enjoyed double-digit gains, the group reported an annual sales decline of 2.8 percent to $749 million (736 million euros) for the fiscal year ending March 31, 2022. The halt of deliveries to Russia alone will cost the Playmobil business around $10.1 million (10 million euros).

In addition, Playmobil officials pointed to higher costs for raw materials and freight as well as supply chain bottlenecks with packaging materials, electronic components and tools.

While supply chain kinks are leading a growing number of companies to move production back to the U.S., local incentives often help determine where they land. Lego is eligible for $56 million in performance grants as a so-called Major Employment and Investment Project and, if approved by the Virginia General Assembly, up to $19 million for site development.

"Virginia is going to brag about Lego for a decade. The incentives are what you'd expect," said Harry Moser, founder and president of the Sarasota, Fla.-based Reshoring Initiative.

The simplicity of Lego's interlocking bricks make the toys a good candidate for domestic production.

"Injection molding and packaging will be highly automated, reducing the unit labor cost differential in the U.S.," Moser said.

Still, with hourly wages for Mexican workers much lower than the U.S. workforce, it seems other factors are at play. Moser estimates Mexican wages are roughly $6 an hour compared with about $20 an hour in the U.S.

"That's a $14-an-hour difference in pay times 2,000 work hours a year. That's a $28,000-per-year difference. The incentives came out to $3,000 a year over 10 years," Moser said, taking into account the $56 million performance grants. "The incentives aren't enough to have brought Lego to the U.S. instead of expanding in Mexico. But the incentives are enough to have made the difference between Virginia or Georgia or South Carolina. Incentives generally don't enable reshoring; they define where reshoring is going to happen."

The value of a made-in-the-USA label also likely played a role in the decision for a U.S. Lego factory, Moser said.

"Surveys show people prefer a made-in-the-USA product and if they can find it they will pay a little more for it," he added. "And, if you can get 10 percent more at retail for made in the USA, it alone will cover about 30 percent more in manufacturing costs."

In one oft-cited survey, nearly 70 percent of 500 respondents indicated that they prefer American-made products. Slightly more than 83 percent responded that they would pay up to 20 percent more for products made domestically. The survey of both consumers and industrial buyers was conducted in 2020 by the Reshoring Institute, a nonprofit and nonpartisan group that offers free research from 14 U.S. university graduate programs in business and engineering.

If the survey were done today, when inflation is being felt, Zahn suspects fewer consumers would be willing to pay 20 percent more for domestic goods.

"It was easier to say yes when your grocery bill wasn't 50 percent higher," he said.

Zahn agreed that U.S.-made goods are popular, but he said there also are some nuances with the labels.

"Some products are designed and assembled in U.S. but they contain foreign components," he said. "That will continue and you might see it with some Lego products. If it's an 1,100-piece set, it's possible a component of it was made somewhere else but its final packaging ends up here."

Before the Lego factory opens in Virginia, a temporary packaging operation will start up in early 2024 in a nearby existing building. The facility will create up to 500 jobs.

"In the temporary site, we will pack Lego," a company spokesperson said. "Until we begin molding activities, Lego elements will be supplied mainly from our factory in Monterrey, Mexico."

The other 1,260 Lego jobs will be phased in over 10 years. Kaufman said construction jobs to build the factory are likely part of the total.

He isn't bracing for an influx of toy manufacturers to set up shop in the U.S. on the heels of Lego, although some "nearshoring" may occur.

"The average price of a toy at retail is $12. That price point makes it very difficult — if there's a lot of manual labor input into the product — to go to a high-wage country. That's part of the calculus as well," Kaufman said.

The nonprofit Reshoring Initiative said companies have been bringing well-paying manufacturing jobs back to the United States by shifting corporate mentality from "offshoring is cheaper" to "local reduces the total cost of ownership," which takes into account not only wages but also factors like shipping, overhead, intellectual property theft and other risks.

Since Lego's parent company is based in Denmark and not the U.S., the Virginia factory project is an example of FDI, but Moser said, "we often blur the difference when speaking of the sum of the two trends and we call it reshoring."

FDI outpaced reshoring until 2020, when the pandemic increased the need to shorten supply chains and companies made bigger efforts to close the gap for essential medical, technical and defense products.

Some 110,000 jobs were created in 2020 by FDI and reshoring. In 2021, another stellar year, about 261,000 jobs were announced by 1,800 companies, bringing the total to 1.3 million in the 10-year period from 2010-21. Manufacturers looked to fill supply chain gaps for semiconductors, EV batteries and renewable energy in addition to essential personal protective equipment and pharmaceuticals.

This year, Moser thinks 400,000 jobs will be added from reshoring and FDI with Lego part of the trend.

He points to the pandemic, war in Ukraine and debates about reducing U.S. dependence on Chinese products and supply chains, or decoupling from China, as a powerful trio of factors at play with economic and national security consequences.

"We have entered a watershed moment for U.S. manufacturing," Moser said. "Over the past decade, the impact of routine logistic costs drove the upward trend to reshore. Now a triad of forces — COVID-19, the Ukraine-Russia war and the risk of China decoupling — have converged to increase the risks of offshoring. The perils of supply chain gaps and the virtues of domestic manufacturing are behind the increasing number of companies moving production back to the U.S."

Lego's goals to manufacture and distribute products in more eco-friendly ways is ongoing.

In 2018, the company began producing some Lego elements from biopolyethylene made from sustainably sourced sugarcane. In 2019, the company introduced a Lego treehouse that contained the first bioplastics in the form of green pieces that were leaves for the tree. In 2020, Lego announced it was replacing plastic bags inside of its boxes with paper ones in response to letters from children urging the toy giant to reduce its plastic use. In 2021, Lego Group unveiled a prototype brick made from recycled PET bottles. The patent-pending material formulation increases the durability of PET to make it strong enough to be Lego bricks.

"Lego is one of our members that is at the forefront of efforts to be more sustainable," Kaufman said. "They have put lot of money behind finding alternatives to ABS for the bricks. They want to reduce their carbon footprint for distribution. They have been looking at alternative energy for a while. They have a wind farm in Denmark."

The Lego factory buildings to be constructed in Virginia will be designed to minimize energy use and then equipped with energy-efficient presses and machines that will be powered largely by a solar park expected to be completed in 2025. The goal is to meet criteria for gold-level certification for the Leadership in Energy and Environmental Design program of the U.S. Green Building Council.

"Lego was already on a sustainable path, and that has only accelerated," Zahn said. "In the last five years, it has almost been like an entire reinvention of the business with products and packaging."

For Lego, plastic toy brick production in the U.S. actually goes back to April 1965, after luggage and furniture maker Samsonite Corp. was granted a license. Samsonite opened a 50,000-square-foot plant in Loveland, Colo., devoted exclusively to manufacturing the building blocks, which were made from a less expensive cellulose acetate even years after Europe switched to ABS, according to a Lego timeline at BrickFetish.com.

Marketed under the name "Lego by Samsonite," the products also were manufactured in Stratford, Ontario, with specialty pieces like trees and vehicles imported from Billund, BrickFetish.com says. In addition, the website says Samsonite had a Lego model shop in its Detroit furniture plant.

However, the Lego line had to share marketing resources with other Samsonite toys, such as board games and roller skates, which in turn were promoted like suitcases and furniture.

At its peak in the late 1960s, Samsonite managed annual Lego sales of about $5 million to $8 million, which lagged Europe, BrickFetish.com says, also making a note that "Samsonite never molded elements with the same care that was used in Billund."

In 1972, the rights for U.S. production and distribution reverted back to Lego. By 1975, the company relocated its management and distribution center to Enfield, which remains the U.S. headquarters.

Lego's plan to build the new factory in Virginia raises some questions about its North American headquarters in Enfield. Lego ended manufacturing and distribution operations in Enfield in 2006 but kept offices in town.

Some industry watchers said the Virginia development may not be a good sign for the company's future in Connecticut. However, a company spokesperson told the Associated Press the decision would have no impact on the size and scope of the Enfield headquarters.

Also, a spokesperson for Democratic Gov. Ned Lamont told Hearst Connecticut Media that Lego's senior leadership had affirmed its commitment to keep the office in the state.

"It is commonplace for corporations to invest and expand in multiple states — and they do so for a wide variety of strategic reasons," Max Reiss told the news outlet. "Lego has been and continues to be a fantastic partner with our state, and we look forward to strengthening this relationship now and into the future."

Still, Fred Carstensen, a finance and economics professor at the University of Connecticut, told Hearst he thinks state officials need to brace themselves for the possibility that Lego's North American headquarters may move to the corporate campus in Virginia.

"They better be worried," Carstensen said. "Physical proximity of a headquarters to manufacturing facilities is definitely a factor companies consider."

Local media also reports that in 2019 the 105,500-square-foot Lego HQ on Taylor Road, which was built in 1995, was listed for sale and that the employees vacated it in early 2020. The building had been owned since 2017 by Mass.-based landlord Winstanley Enterprises. The Lego website lists the U.S. HQ as 100 Print Shop Road, Enfield.