Making the United States an even more attractive location for factories and investments is critical for the health of our nation. More domestic factories would help create more balanced trade flows and a more stable global economy. But company decisions on what and where to place production facilities, while influenced by many factors, ultimately depend on the maths.Thankfully, the maths these days is starting to work in America’s favour again.
Our research last year suggested to us that changing conditions in China would bring home some of the manufacturing work that migrated overseas during the past decade. We originally saw this “insourcing” phenomenon, as the White House now refers to it, starting around 2015.
We were deliberately conservative in our estimates and made clear that the coming manufacturing renaissance would benefit some industries more than others, with seven sectors benefitting the most: vehicles and auto parts, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics. These seven sectors currently account for nearly two-thirds of the more than $325 billion the U.S. imports from China.
We noted that several factors had combined to push these sectors toward a tipping point, when U.S. manufacturing becomes an attractive alternative to China. These factors include China’s rapidly rising labour costs, which we discussed in an earlier HBR blog; the increased value of the yuan; the challenge of managing long-distance supply chains; the quality control concerns that continue to haunt many manufacturers that have offshored production; and the significantly higher productivity of U.S. workers.
Some of the changes we anticipated taking place several years from now are already beginning to have an impact. Furniture manufacturing is returning to North Carolina. The auto industry is increasing production, with many OEMs increasingly viewing the U.S. as a low-cost location for their plants — good news for both Detroit and the industrial south. And U.S. exports are on the rise — on target with last year’s White House prediction that exports could double in the next five years.
Assuming the trend continues, as we expect it to, the economic impact could be substantial, resulting in as many as 2 million, and possibly up to 3 million, U.S. jobs between now and the end of the decade. An estimated 600,000 to 1 million of these jobs would be directly in manufacturing, with the remainder in construction, orders for new equipment, supporting services, transportation and retail sales. This could increase U.S. gross domestic product by $100 billion, lower the non-oil U.S. trade deficit by 20% to 35%, and reduce unemployment by 1 to 1.5 percentage points.
While the politicians have many proposals for recharging the U.S. economy and growing the pie, it’s time to put aside partisanship and come together on a common agenda that will accelerate and amplify the insourcing trend and grow the pie for all Americans.
As we all know, U.S. manufacturing has faced many threats in the past. “Japan Inc.” was going to close down U.S. factories in the 1970s. Then came the Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan. Now it’s Brazil, China and India.
Each time, U.S. manufacturing took a hard blow, adjusted, and recovered. So today, some 40 years after the Japanese challenge first emerged, U.S. factories are producing two-and-a-half times more than they did in 1972, in terms of manufacturing value added, with 30% less total labour.
The China challenge could play out the same way. While China is much larger and a bigger threat, its wages are rising 15-20 per cent per year and its domestic demand for consumer goods is growing rapidly.
The U.S. manufacturing renaissance doesn’t mean Chinese factories will shut down or even slow down. With high growth in China, more plants will be needed. As companies think through their plant networks, many will see the benefit in building new plants in the United States to serve the U.S. and western export markets, while retooling plants in China to make goods for the Chinese and Asian markets.
Not all products will return to the U.S. Sectors like apparel, footwear and textiles will continue to be grounded in China and other low-wage countries that enjoy a large labour cost advantage over the United States. Others may stay overseas due to the benefits of being part of a manufacturing cluster. The biggest impact will be felt by sectors in which wages account for only a moderate portion of total production costs — and in which shipping costs, distances and time are often critical.
Some production migrating from China will go to Mexico, where labour costs remain much cheaper than in the United States. But this will be limited, we believe, because of logistical concerns and because the United States has more skilled workers — among the most productive in the world.
To understand why companies invest here rather than someplace else, just do the maths. The numbers are now telling us that the United States is becoming competitive again.