The Manufacturing Pendulum Is Swinging Back from China to the USA

By Mike Hart 

I have long thought that American companies have gone overboard in moving so much manufacturing to China.  On paper, the cost savings were and remain significant, but there are many hidden costs – shipping, logistics, communications, product recalls, intellectual property theft, counterfeiting – that offset the cost savings advantage.  Blinded by the huge potential of the Chinese domestic market, American companies have flocked to China over the last decade, fearing that if they didn’t do so, some other competitor would and they would be out of the game.

Because of the fear of not being in the Chinese market, America companies over-corrected and rushed to China without weighing all the costs.  At first, manufacturing in China was a no brainer because labor costs were so low.  But labor costs have risen dramatically over the years and all the other hidden costs of doing business in China are coming to light. 

The Boston Consulting Group (BCG) created a stir in the media this month when they released an analysis projecting that the United States will experience a manufacturing renaissance in the next five years as the wage gap with China shrinks.   

Press Release – Made in the USA Again

Here is an excerpt from the press release addressing the closing wage gap:   

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

When you compare the United States and China, you have to compare individual regions.  Some areas of China still have incredibly cheap labor, but most of the manufacturing is in the Eastern coastal areas where companies bid up wages competing for the limited supply of skilled labor needed to run all these modern plants.  In addition, industrial land is in short supply and office rents and utility costs continue to rise. 

Here in the United States, you would never locate a new plant in my state, California, but labor and tax-friendly states such as Mississippi, Alabama, and South Carolina are highly cost-competitive. 

Here is a good article I ran across from EDN magazine that makes similar points to the BCG analysis from the perspective of the EOEM (electronic original equipment manufacturers) industry: 

Manufacturing Trending Away from China

Companies are learning that proximity to the markets they serve is more important than cost savings, especially as the cost gap continues to narrow.  Being able to supply products quickly when needed is often far more important than having lower cost products with long lead times. 

China is here to stay as a manufacturing power.  The shear size of its own economy guarantees this.  And China remains ideal for certain types of high-volume manufacturing with long lead times.  But if you consider all the advantages certain regions of the United States offer – skilled workers, proximity to markets, communication skills, supply chain efficiency, intellectual property rights, and a lower dollar – all the conditions are ripe for a manufacturing renaissance in this country.     

Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Comments

[Tod]

I will comment on intellectual property issue:
Under "agreement" in China many Chinese will understand as verbal agreement. One must remember that you are dealing with western mind set where fear of 'loosing face' is well imbedded in the thinking of the self respecting business man.
So if you are dealing in the first place with known and respected company / people then you can have a security of the NDA as well general business trust build without any paperwork. Not to mention that foren company have lite chance enforcing complex agreements in the local court that rule if favor of locals.
So, travel China, meet people, spend time with them, build relationship, judge character and you will be OK.
My 2 cents worth of experience.
Tod from www.pa-international.com.au

[Clay Williams]

I LOVE hearing this. We are 'made in the USA', but I was speaking to a manufacturing CEO out of Florida who has a bad opinion of the quality he's seeing from American vs Chinese factories. Americans need to step up! We have the work ethic and attention to detail, we have just become unhappy with good, honest labor-intensive jobs.

[printing services]

The manufacturing industry has issues that need to be addressed as well. It's about balancing the funds.

[business consultant]

Trends aren't as black and white as it may seem, though. There other considerations to factor in, such as the cost of constructing/refitting manufacturing equipment and locations. Another probability is that another market or country may rise up to fill China's manufacturing shoes.