Veteran market strategist Rich Bernstein recently published his list of three secular investment themes.
Among them: the American Industrial Renaissance.
“Small and mid-cap US-focused industrial and manufacturing companies are gaining market share,” he said.
One of the more talked-about forces at play in the American Industrial Renaissance is the decreasing competitiveness of Chinese labour costs.
Many of us are used to hearing our parents and grandparents tell us about how all of the manufacturing jobs have been shipped to China.
But with the standard of living rising so quickly and the size of the available labour force shrinking rapidly in low-cost countries like China, wages are rising rapidly. In China specifically, wage growth has far outpaced the growth seen in the U.S. As such, the marginal manufacturing capacity is reshoring to the U.S. (see chart).
Here are all of the forces Bernstein identified as pushing the American Industrial Renaissance forward:
1) Wage compression — although the absolute level of wages in the emerging markets remains less than that in the United States, the difference has been closing (see Chart 1). For example, a recent Bloomberg article highlighted that China’s wages are likely to rise by 10- 15% during 2014. US average hourly earnings are currently rising less than 2%.
2) Lower energy costs — according to Empirical Research Partners, energy accounts for only about 5-7% of manufacturing input costs. However, lower US energy prices are nonetheless helping to keep overall US manufacturing costs competitive.
3) Quality control — the December 2012 Atlantic Monthly has a case study regarding on-shoring of US manufacturing. Quality control was cited as one of the main reasons companies are bringing total manufacturing back to the US rather than simply assembling foreign produced parts. The article discussed the difficulties rectifying quality control problems with distributed global manufacturing.
4) Transportation costs and time to market — the cost of shipping parts around the world and the associated time can be hidden costs that hurt both profit margins and market share.