$100B in lost output to China coming home: BCG

Manufacturing in China for North American markets is not as cost-effective as it once was, and it appears some of the lost US production may be coming back.

October 27, 2011   by PLANT STAFF

CHICAGO: Sometimes proximity is a good thing. Manufacturing offshore in China for North American markets is not as cost-effective as it once was, and it appears some of the production lost to overseas locales may be coming back to the US.

New research from the Boston Consulting Group (BCG) in Chicago suggests transportation goods such as vehicles and auto parts, electrical equipment including household appliances, and furniture are among seven sectors that will reach a tipping point by 2015 and could create up to 3 million jobs as some of the manufacturing returns to North America. BCG expects the trend to accelerate starting in the next five years.

The “tipping point” is where China’s shrinking cost advantage should prompt companies to rethink where they produce certain goods meant for sale in North America. BCG said in many cases, companies will shift production back from China or choose to locate new investments in the US, which is also expected to become a more competitive export base for Europe and Canada.

“A surprising amount of work that rushed to China over the past decade could soon start to come back – and the economic impact could be significant,” said Harold Sirkin, a BCG senior partner and lead author of the analysis. “We’re on record predicting a US manufacturing renaissance starting by around 2015. Now we can be more specific about which industries will return and why.”

BCG’s research shows other sectors most likely to return are plastics and rubber products, machinery, fabricated metal products and computers/electronics. The seven groups together offer an additional $100 billion in output to the US economy and lower the US non-oil trade deficit by 20% to 35%.

The tipping-point sectors account for about $2 trillion in US consumption per year and about 70% of US imports from China, valued at nearly $200 billion in 2009. The job gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation and retail says BCG.

“This does not mean that factories in China will close,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Instead, more of their output will be consumed in the fast-growing domestic market and elsewhere in Asia.”

With Chinese wages rising at 15% to 20% per year and the value of the yuan continuing to appreciate against the dollar, the report predicted that the once-enormous labour-cost gap between Chinese coastal provinces and certain lower-cost US states will shrink to less than 40% by around 2015.

When higher US productivity, the actual labour content of a product, shipping, and other factors are taken into account, the cost advantage of making many goods in China that are bound for sale in the US will be marginal.

Chris Kuehl, economic analyst for the Rockford, Ill.-based Fabricators & Manufacturers Association Intl. (FMA), notes the rising costs of production in China has become a major concern for the Chinese.

“There is no way to reverse that trend without creating some serious social unrest in China. Wages and salaries have been going up fast in China – estimates are that wages have risen by more than 1,000% in the coastal regions just in the last year or so.”

He said the Chinese are losing ground to rivals in other parts of Asia and to nations such as Mexico, where wages have risen by less than 25%.

Transportation costs are also going up as the price of energy escalates, but he said there is also a supply chain issue of speed and accuracy. “It is far less reliable to ship by ocean cargo than by rail or truck, which gives an advantage to the producers that are on the same continent as their consumers.”

Greater productivity from the application technology and robotics has also allowed US employers to employ fewer people than in the past, while setting output records. “This has allowed the US to compete globally for manufacturing business and it has allowed many in the U.S. sector to regain some business from overseas suppliers.”

The research builds on an initial analysis that BCG released in May and further developed in an August report titled Made in America, Again: Why Manufacturing Will Return to the US.

The new analysis spells out what cost swings will mean to specific industry clusters. Sectors like apparel, footwear, and textiles will remain largely offshore because China and other low-wage nations will still enjoy large cost advantages.

The biggest impact will be felt in sectors in which wages account for a relatively small portion of total production costs and in which logistics costs and other factors such as shipping time and distance are critical.

Click here for The US Manufacturing Renaissance: Which Industries?

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