Within the next five years, the United States will experience a "manufacturing renaissance" as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world.
My late Father always liked to say, “The pendulum always swings both ways.” That’s why, even during the darkest days of the Great Recession, I believed that American manufacturing would eventually bounce back.
A new study just released by The Boston Consulting Group Inc. (BCG) offers some tangible evidence of this trend. Within the next five years, the United States is expected to experience a "manufacturing renaissance" as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world.
Some legislative activity announced yesterday in Washington could help ensure that happens. House Democrats unveiled a multipart Make It In America initiative. It includes several broad-reaching proposals, including the National Manufacturing Strategy Act (H.R. 1366), which directs the President to work with industry, labor leaders and other stakeholders to develop a national strategy to increase manufacturing.
Another narrower, but nevertheless intriguing, proposal is the Keep American Jobs from Going Down the Drain Act (H.R. 1684), which gives preference to U.S.-made goods and materials for use in the installation, replacement and improvement of drinking water and waste water infrastructure projects.
“We need to rebuild our infrastructure, renew our manufacturing base and educate our people,” claims Robert Borosage, co-director of the Campaign for America’s Future, which endorses the legislation. “America needs an industrial policy to help fit these pieces together. If enacted, [the Make It In America initiative] would help put the U.S. back in the game of modern manufacturing, exporting and job creation.”
That’s not that far-fetched, according to the BCG report. Various economic forces at play today are driving an emerging Made in USA trend, which is expected to accelerate significantly by 2015.
With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states-including Alabama, Mississippi and South Carolina-increasingly competitive as low-cost bases for supplying the U.S. market.
“All over China, wages are climbing at 15 percent to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” claims Harold Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by 2015. As a result of the changing economics, you’re going to see a lot more products Made in the USA in the next five years.”
After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are only expected to be about 30 percent cheaper than rates in low-cost U.S. states. And, since wage rates account for 20 percent to 30 percent of a product’s total cost, Sirkin says manufacturing in China will only be 10 percent to 15 percent cheaper than in the U.S.-even before inventory and shipping costs are considered. “After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely,” he explains.
Products that require less labor and are assembled in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as consumer electronics, will likely continue to be made overseas.
“Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs,” warns Sirkin. “They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother-and that’s before taking into account the added expense, time and complexity of logistics.”
According to the BCG study, increasing use of automation in China is unlikely to change the economic equation. Even if automation drives productivity to parity with the United States, savings will likely be lower than in the past.
The BCG study cites Caterpillar Inc. and NCR Corp. as examples of leading U.S. manufacturers that have bolstered their domestic manufacturing strategy in the last year or two. It also explains why toy manufacturer Wham-O Inc. recently returned 50 percent of its Frisbee and Hula Hoop production from China and Mexico to the United States.
“Executives should not make the mistake of comparing the average labor costs for production workers in China and the U.S. when making investment decisions,” warns Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “The costs of Chinese workers are still much cheaper, on average, than comparable U.S. workers, and some managers may assume that China is a better location. But, averages can be deceiving.
“If you’re just comparing average wages in China against those in the United States, you’re looking at the problem in the wrong way,” argues Zinser. “Average wages don’t reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today.”
However, even as more manufacturers ramp up their U.S. assembly lines, Zinser believes China will remain an important manufacturing region. “Investments to supply the huge domestic market in that nation will continue,” he points out.