In a compelling Harvard Business Review article entitled "You Can't Understand China's Slowdown Without Understanding Supply Chains," MIT professor David Simchi-Levi lays out four forces propelling the U.S. Manufacturing Renaissance. China's double-digit growth is declining, and its government has desperately cut interest rates and debased the country's currency multiple times this year because there are large and urgent problems looming. U.S. manufacturing employees will be the winner.
Simchi-Levi credits some of the Chinese slowdown to the steady march of "near-shoring" (or reshoring), which means building products near the client (not a Pacific Ocean away).
Citing a study of 156 U.S.-based companies, an MIT report called "U.S. Re-Shoring: A Turning Point" indicated the early glimmers of a sentiment shift, with 15 percent of U.S. companies responding that they were "definitively planning" to move production back to the U.S." Simchi-Levi identified a more recent survey showing a doubling of reshoring with 32 percent having already completed the process of reshoring or close to finishing in order to "meet end-market demand." Even more reassuring is the fact that "48 percent said near-shoring activities are likely within the next one to three years."
Simchi-Levi believes that "the world is in the middle of a transformation, with companies moving from a global manufacturing strategy, whose focus is on low-cost countries, to a more regional strategy, where China is for China, the United States (or Mexico and Latin America) is for the Americas." He stresses the four elements that have changed, and which will propel U.S. manufacturing's ascent:
1. Oil prices. American oil is much cheaper than the rest of the world's since we are awash in petroleum (thank you fracking revolution), so it is cheaper to build components that need this basic resource. This critical input makes U.S. manufacturing enviable--particularly since Chinese factories are forced to import virtually all of their petroleum.
2. Labor costs. A decade ago, there was a huge chasm between U.S. factory worker wages and those of Chinese workers. Chinese labor costs increased 20 percent annually compared to modest increases in the U.S. of a mere 3 percent. This has lowered the gap between U.S. workers and their Chinese competitors. Chinese labor savings have dissipated. What is the point in building in China then?
3. Automation. Marlin Steel has invested $4 million in new robots and automation to make our custom wire baskets. This has supercharged our productivity--it is like giving our employees steroids so they outperform their rivals. This wise investment theme is being widely pursued by U.S. factories. It makes our employees indispensible and well-paid ($77,000-plus per year on average). The hunt is on for U.S. factories to hire skilled talent to run hyper-productive robots instead of hiring hordes of low-paid "throwaway employees," as pursued by Chinese factories. Chinese employees are living in a modern Charles Dickens novel.
4) Risk. Intellectual Property Rights are protected in the U.S. and brazenly pilfered in China. It is risky to build overseas. GE is forced to divulge trade secrets to sell products in China. U.S. municipalities protect our secret sauce, they don't divulge it. The current turbulence in China--with the government both arresting over 100 reporters who wrote articles on the economic downturn and destroying its currency--is unsettling to people with a long-term vision. Building a factory is the ultimate commitment, since the payback will be years away, and the safe bet is to build in the U.S.
Simchi-Levi stresses that some industries, like phone and computer manufacturing, will probably remain in China. However, cars and appliances will probably be excellent candidates to be made near the domestic buyer, since freight is such a large factor in the total cost.
These four new developments are forcing wise companies to reevaluate if it is time to move production back to the U.S.
Special thanks to Professor David Simchi-Levi at the Massachusetts Institute of Technology.