In 2010, China had been overtaking the US as the number one biggest manufacturer in the world. However, a recent study from the Boston Consulting Group entitled, The Return of US Manufacturing, suggests that a “manufacturing renaissance” may be afoot in the US.
It’s a trend still very much in its earliest stages, but there are a couple reasons for manufacturing’s slow rebalancing back toward the US. Wage rates are increasing in China at the same time as they are decreasing in US. This is the case while productivity levels also remain higher in the US and the yuan continues to appreciate, making Chinese goods relatively more expensive. Together, these factors contribute to a potentially continued increase in the relative attractiveness of returning manufacturing work to the US.
According to The Fiscal Times:
“China’s wages are rising by 15 to 20 per cent a year, while its productivity will improve at half that rate. The yuan is gaining in value, too, and Chinese-made products are destined to become more expensive. There is a shortage of skilled workers even in major manufacturing centres such as Shanghai and Tianjin.
“In the U.S., wage increases have been minimal for years and will remain at 3 per cent or so annually. U.S. productivity will remain higher than China’s by a wide margin, and government incentives are also a factor in attracting U.S. manufacturers back home. ‘Reinvesting in the U.S. will accelerate,’ the study says, ‘as it becomes one of the cheapest locations for manufacturing in the developed world.’
“The maths that went into this study is impressive, and it works like this: Right now, labour costs in China are slightly less than half those of the U.S. when the difference in productivity is factored in. In five years’ time, labour costs on the mainland will be 70 per cent of the U.S. figure. Counting costs such as inventory and shipping, the study says, the Chinese cost advantage will drop to single digits or disappear entirely.
“It’s a convergence theory of a kind, and one forecasted result is that outsourcing jobs to China will turn out to have a beginning, middle, and end. ‘China will no longer be the default low-cost location for supplying the U.S. market,” the BCG study asserts. ‘The economics are becoming marginal for many products.'”
A few examples of the US companies repatriating manufacturing include Caterpillar tripling its excavating equipment production capacity, NCR bringing home automated teller machine production, and toy maker Wham-o returning 50 per cent of its Hula Hoop and Frisbee production from China and Mexico. A couple data points offer some support for the concept, yet are by no means a guarantee of an ongoing trend in the making.
The study also points out that although the US has added 250,000 jobs in manufacturing since early 2010, it has a long way to go to recover the roughly 6 million jobs it has given up over the past 10 years. Further, production growth to date has been concentrated in oil and computers, while most other sectors have continued to decline. You can read more details in The Fiscal Times coverage of how manufacturing jobs are returning home to the US.
How Manufacturing Jobs Could be Returning Home to the US originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.
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