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This analysis explores the evolving landscape of manufacturing in the U.S., highlighting factors that are closing the outsourcing gap to China. Rising wages in China, high real estate costs, and improved productivity in the U.S. are shifting the manufacturing equation. While China became the powerhouse of global manufacturing over the past decade, emerging trends suggest a potential resurgence of U.S. manufacturing, particularly for industries where labor costs are less critical. Companies need to reassess their production locations in light of these changes.
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Made in America, Again Boston Consulting Group August 2011
Will manufacturing return to the U.S.? • Emerging factors that will close the gap for many goods consumed in the U.S. • Rising wages in China • High real estate costs in China • Higher U.S. productivity • Weaker dollar • Low real estate costs in U.S. • Higher transportation costs
China’s Dominance • China became the default location for plants during the past decade: • Cheap labor • Growing number of engineers • Fixed currency • Inexpensive land, free infrastructure, generous financial incentives
China’s Dominance • 2000-2009, China’s exports rose by a factor of 5 to $1.2 trillion annually. • Became substantial producers in world markets for: • Apparel (32% of world market) • Furniture (26%) • Telecom equipment (28%) • Office machines and computer equipment (32%) • Ships (19%) • The U.S. lost 6 million manufacturing jobs, closed tens of thousands of factories during same period.
Manufacturing Again? • Though employment fell, manufacturing output in the U.S. actually grew during the last decade by one-third due to productivity gains. • Due to higher U.S. productivity, and rising wages in China, China’s cost advantage is dissipating: sometime around 2015, manufacturing will be just as economical in the U.S. as in China. • The reallocation of new production to low-cost states (such as Tennessee) has just begun.
New Manufacturing Math • China’s wage rates are growing rapidly, up 150% 1999-2006. Wages rose 19% annually 2005-2010. • And wage growth is faster than productivity growth in China. • Manufacturing wages rose just 4% annually in the U.S.
Tide is Turning • Which manufacturing industries will benefit? Those in which labor costs are small compared with total costs, and those producing relative low quantities of goods. • Auto parts • Construction equipment • Appliances
Tide is Turning • Which manufacturing industries will NOT benefit? Those in which labor costs are high compared with total costs, and those producing relative high quantities of goods. • Apparel • Shoes • Furniture
Other Costs • Prices are surging in China: • Price of electricity up 15% since 2010. • Coal prices, utility rates rising. • Industrial land no longer cheap; $10.22 sq ft in China, compared with $1.30 - $4.65 sq ft in Tennessee. • Shipping rates are rising: rising fuel costs, scarcity of ships, and shortage of container port capacity. • China’s currency is slowly appreciating v the U.S. dollar.
China’s Future • Will remain a global manufacturing power. • Multinational companies will not pull out of China, but will orient production to serve local and Asian markets.
U.S. Future • Companies should evaluate carefully where to locate new plants; China should no longer be the default option. • Wage costs differences are still large but narrowing. • Productivity, transportation costs, energy, and other expenses are very important considerations. • U.S. will be increasingly more attractive for low-labor content goods that are sensitive to transportation costs.
