Is Manufacturing Coming Back to the U.S.?

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More and more, we start to read news like some US companies are bringing jobs back to USA so I decided to investigate this in depth to see if this a trend that we will see in long term. The last decade was a paradise for many Chinese factories as cheap labor was abundant, credit from banks & government were limitless and RMB (Chinese yuan) devaluation was all in their favor. Labor rights, collective bargaining, strikes were all concepts of the developed world where they did not mean much in the cheap capital & labor abundant land. For a long time, every party involved in the supply chain from the local factory worker (who earned cents an hour) to the end consumer in a local suburb USA (who saved significant dollars) were happy with the new business model however the rules of economics especially in the long term is not a win-win but a zero sum game. By zero sum game, I mean in the long run the winnings of one translate into the loss of the other.

The reasons of this game change can be summarized as below:

# 1 As the level of investment goes higher with the help of cheap capital; the available labor where it used to be higher in the graph begins to come down. More and more workers became educated and with the help of the technology, they start to be more mobile even in a big country like China. Last year, the trend was that the workers were moving more to the North China since the factories were paying higher salaries so the factories in the South had significant labor shortages.

# 2 Chinese government used to be a good supporter of cheap capital & export incentives as double digit growth was needed for the country to flourish but the idea of becoming the low level producer of goods and importing high level goods from USA was not appealing so the government slowly started to lend less money to exporters who produce low value goods. Another measure that government started to implement is letting the Chinese currency fluctuate more which is more bad news for the factories.

# 3 Rising cost of freight rates & Bunker fees where managers in USA started to add this more in their calculations to either buy local or import from overseas. Below graph clearly shows the upward level of Bunker in the long run.

# 4 Shortage of capital in USA & problems with cash flow led many importers to buy more locally. Let me explain this with an example, after comparing the prices of an item made in usa vs made in china a manager decides to save money by ordering in china however the producer in china needs a significant deposit up front to start the production so with an average of 60 days of production time + 30 days transit, the company already looses 90 days of hard needed cash. Assuming you are offering terms to your clients in USA (which is a common practice) you loose another 30-60 days to get paid making the cash idling for approximately 120-150 days. From a cash shortage importer’s point of view, it starts to make more sense buying more locally than ordering from overseas.

All these factors support the data that is published by the Purchasing manager’s Index which is considered to be one of the main economic indicators. Below excel data clearly shows that the PMI is slowly coming down as manager’s becoming more aware of the rising cost in china and finding alternative ways to supply goods.

Month PMI   Month PMI
Nov-11 52.7   May-11 53.5
Oct-11 50.8   Apr-11 60.4
Sep-11 51.6   Mar-11 61.2
Aug-11 50.6   Feb-11 61.4
Jul-11 50.9   Jan-11 60.8
Jun-11 55.3   Dec-10 58.5
Average for 12 months – 55.6
High – 61.4
Low – 50.6

According to BCG (Boston Consulting Group), the next couple of years USA will have its own renaissance as the wage gap between China and USA gets smaller. With the increase in workers productivity in USA and higher wages in big cities in China, for certain items manufacturing in China will be only %10-15 cheaper than USA and when you consider the shipping costs & duties, the percentage comes down to single digits. In the end, for certain products like Textiles, electronics etc (more labor intensive) will likely to be imported from overseas as it is now and for less labor intensive products like household appliances, more and more people will likely to buy locally.

11 COMMENTS

  1. Very informative article. Personally I see many growth parallels between the USA and China. China, like the USA in its manifest destiny move westward has moved from agricultural subsistence farming to manufacturing. The former US capitalist titans of industry were in constant search for modernization and LOW COST labor. The same is true now in China as they struggle to keep wages low. With low wages the US eventually saw the creation of labor unions for workers rights. Certainly China is not a democratic country like the USA so I don’t expect to see UAW, AFL-CIO or other unions moving there. Still, 20 – 30 years ago I would not have predicted the changes we see there today.

  2. Made in China has became a synonym to cheap, not well made. There is also a growing demographic out there who are willing to pay more to have a better quality product. In the era of fiscal crisis, luxury goods prove to be resilient to the current economic recession. This should be a clue to bring back at least some business to US and Canada. As some of you have mentioned before, shipping and duties costs add up to the unnecessary production costs and should be taken into consideration as well.

  3. If North American manufacturers can capitalize on the factors that are leveling the playing field, they are poised to do well.

    It’s not enough to say overseas goods are cheaply made, that’s apparent because of the pricing. We need to clearly explain why it is expensive to deal with cheap goods, before price even becomes part of the equation. If manufacturers help their customers see the total price of the goods, not just the initial price of the goods, they have a fighting chance

    Good article. Thanks

  4. Very interesting investigation, I follow your ideia. Therefore in short-term and mid-term, I think crisis still hurdles USA´s rennaissanse as well as EU´s. Emerging countries have the global money now, and China has been growthing faster than either other economic. Also, China´s product has getting better in quality.
    Wages gap do tends to shrink gradually mainly if chinese people start demanding for labor rights. But China is still socialist , just opened to the world trade, it may take long time.
    Also I am in doubt if labor impacts too strongly on prices… Being USA capitalist and China socialist I would dare say that profit margin accrued in the whole supply chain and infraestruture fees, impact stronger than labor cost. And, perhaps, if US companies waive their profit margin, manufacturing may become more competitive and recovery faster than expected.
    I appreciate very much your investigation, and thank you for sharing it with us.

  5. Hello there, I found your blog via Google at the same time as looking for a related topic, your website came up, it appears great. I’ve bookmarked it in my google bookmarks.

  6. With abundant natural gas in the USA and below 3$, it’s only natural that the US petrochemical industry will experiment a tremendous impulse.

  7. there is a flip side of this topic, definitely US companies could try to bring their production back to the US for the sake of job creation and stay profitable. but the question is, is this the right way to do so? is this really commercially viable?
    for example textile/garment sector
    First – Is the US manufacturing sector ready to take back the production of garments manufacturing? the gap been already created over the last 30+ years how they will bridge that? the industry already adopted so many new technologies and ideas for this sector over the years, how to manage those?
    how about supporting industries? fabrics , accessories and others?
    these all already being developed in Asia.
    if we look in to the bigger picture ultimately it does not help the global economy.
    in my opinion what US should try to do is Lower the duties on imported items and let the US companies/ importers stay profitable and focus on innovation and labor intensive high tech/end industries, i think it is neither viable nor make any sense for US to come to in competition with Asia for such industries like Garments manufacturing etc

  8. I believe the U.S. has a huge opportunity, given the global economic conditions, to change the notion that the majority of U.S. goods are made outside the U.S. Looking at the macroeconomic strategy, it seems like we are positioning ourselves to become a game changer in the manufacturing world. Political factors along with fuel & labor cost all are putting pressure on American companies to think outside the box. The biggest issue seems to keep revolving around production cost. In order to bring manufacturing jobs back home, American factories have to be more competitive with Chinese factories. So the root of the question is how? For the most part one company by itself lacks the financial capability to bring manufacturing home. Sourcing out production with domestic manufactures is often met with resistance due to lack of volume. Simple math right? Company A doesn’t meet the volume requirement & cost to produce goods domestically is not cost effective and therefore must look for alternatives.

    In order for a company to produce assembly goods domestically a new approach should be taken. Think about what makes China so great? They can make goods quick and cheap and the labor costs up until recently have been dirt cheap. So the real question is how can the U.S. become more competitive? Simple, Strategic Partnerships/Alliances! Think history for a minute and look back at World War I & II. Each war would have ended in a stalemate and could have easily been lost if not for the alliances that were formed. Throughout history wars were won through strategic alliances regardless of conflicting ideologies. Simply put, these alliances were created due to a common cause to fight what they believed was wrong. Right now we are in a manufacturing war! The war to manufacture goods in the good ole USA!

    So the solution is simple. Companies in similar industries who partner together to create domestic jobs and bring manufacturing back to the U.S. Take it a step further and apply a 4PL type concept! Think about the formation of an alliance with distribution, warehousing, logistics, & manufacturing. The formation of an alliance or partnership which would open the door to new opportunities that gives several companies in similar industries a competitive advantage by producing certain goods domestically vs. different companies producing goods & operating independently from each other. For example, if a company has a good product their focus will be on the R&D, sales, & marketing of their goods. Regardless of competition each company is sourcing their goods from China. However those factories in China often produce those same goods for several U.S. companies that compete directly against each other. Often companies end up producing different types of assembly goods in China which once sent to the U.S. are used to manufacture a finished good. Production of those assembly goods in the U.S. is the golden opportunity to bring manufacturing home and offer innovative U.S companies the opportunity to produce goods domestically. This creates the ideal setup for U.S. companies to become more cost effective.

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