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Is Manufacturing Coming Back to the U.S.?

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.

Rojda Akdag
Rojda Akdag
Rojda is originally from Turkey and after getting his BA from Koc University in Istanbul, he moved to New York to get his MBA at Baruch College. He has been working at MTS Logistics since 2003 and has held many positions from Operations to Development Manager. He is currently residing in Los Angeles where he is the Managing Director of MTS. Fun Fact(s): Rojda is an avid golfer, a martial art practitioner, and a motorcyclist!

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