Made in America, Again

1. Made in America, Again Boston Consulting Group August 2011

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. New Manufacturing Math

8. 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

9. 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

10. 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.

11. 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.

12. 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.