For years, manufacturing overseas relied on this assumption—whether true or not—that it was cheaper to manufacturer abroad where overseas workers, particularly the Chinese, were generally willing to work for less. That's still true now, but to a diminishing degree.
Last month, The Boston Consulting Group released a report titled "Made in America, Again," which predicts the resurrection of the American manufacturing industry by 2015. In it, the authors conclude that the manufacturing economy in China is maturing, and workers are demanding more. Wage and benefit increases have surged 15 to 20 percent per year at the average Chinese factory.
This comes at a time when American wages are languishing, making them cheaper to employ. Specifically, the report cites a combination of economic forces that is "fast eroding China's cost advantage as an export platform for the North American marker."
This change is forcing retailers to confront a new reality: it's just not that cheap to have stuff made in China anymore.
For years, the U.S. maintained a labor-cost advantage of up to 50 percent compared to low-cost states. But because of the wage-rate increase, the report concludes that the savings gained from outsourcing to China "will drop to single digits for many products" by 2015. This change is forcing retailers to confront a new reality: it's just not that cheap to have stuff made in China anymore.
Other factors cited by the report, including increased shipping costs, diminishing levels of productivity, and the limits of automation are contributing to what the report calls "U.S. manufacturing renaissance."
"This reallocation of global manufacturing is in its very early phases," the report notes. "It will vary dramatically from industry to industry…But we believe that it will become more pronounced over the next five years, especially as companies face decisions about where to add future capacity. While China will remain an important manufacturing platform for Asia and Europe, the U.S. will become increasingly attractive for the production of many goods sold to consumers in North America."
Plenty of companies are fine-tuning their cost-benefit analyses, and coming away with the same answer, notes Waddell.
For example, the BCG report highlights several recent examples of U.S. companies moving jobs back to American manufacturers. They include the Coleman Company moving its production of plastic coolers back to Kansas, Sleek Audio moving its headphone manufacturing back to Florida, and Peerless Industries, which makes audio-visual mounting systems, back to Illinois.
"Some have just decided to come back to the U.S., while others are going to Mexico," says Waddell. "Our key in this country, is if they're leaving China, get them to come back here. Don't let them run off to the next cheap place."
How to Bring Manufacturing Home
Although the tide may be beginning to turn for local manufacturing, the situation for American manufacturers is still far from ideal. Currently, there are two major problems that American manufacturers confront on a daily basis: currency manipulation, and a lack of qualified American workers.
Currency manipulation has been around for years. From 2008 to 2010, for example, China had pegged the yuan to the dollar, which kept its value artificially low. It also made Chinese exports cheap for American companies, who assemble—not manufacture—their products domestically.
On one side, Waddell explains, are large corporations such as Whirlpool that outsource their material manufacturing to China, as well as the banks that invest in these companies. These groups have strong lobbies in Washington, which have prevented any major legislation from passing through.
"All of those components are made in China, so anything that makes China less competitive hurts them," he says
The other side, of course, are small and medium-sized manufacturing plants that see clients finding cheaper materials overseas. Legislation—some as recent as October 2011—has been introduced to combat currency manipulation, but politicians have largely stalled on the subject.
"The Obama administration keeps talking about how they're going to get tougher on China," Waddell says. "And the Republicans said they're going to get tough on China too. But we'll see of push comes to shove if any are actually willing to get tough on China."
The other major problem is a shortage of talent for American manufacturers. Plants have become more technologically advanced, and necessitate some vocational school training. Waddell points out that it's becoming more and more difficult to find a pool of workers that are qualified to work around machines—and interested in doing it. It's a point echoed by the The Alliance for American Manufacturing, a non-profit that lobbies for American manufacturing.
"We need an educational system that does not warehouse kids who want vocational careers," writes executive director Scott Paul. "We need our business schools to teach managers how to "reshore" work rather than follow the race to the bottom."
Could e-Commerce Change the Big Picture?
Winthrop believes the Web is an intricate part of the puzzle. Because the internet enables a direct-to-consumer model, it has the potential to cut out expensive parts of the supply chain.
"There's a general growing comfort level with not only consuming online but buying things like shoes and apparel online," he says. "It's changing people's preconceived notions about how you make things in the U.S. We obviously believe that that's going to get increasingly acute in the apparel industry."
He adds: "I'm not sure that that that realization is dawning on a lot of people in the manufacturing side of things, whether they understand that 'Wow, there really is this moment that's happening where we can begin to tip the scales.'"
