Advertisement

Blog

Reshoring the US Economy

The term “reshoring” is coming into vogue now as the possibility exists that we may see several firms bring back their manufacturing operations to the United States as a result of rising wages in China.

Recently, I read an article in the Supply Chain Digest from June 6, 2011 titled “New Study From Boston Consulting Finds China Manufacturing Cost Advantage Over US to Disappear by 2015.” Admittedly, the fact that this article is over a year old is why it caught my interest, because now we have the happy opportunity to see if the labor cost escalation trend has actually been moving up at the predicted rate.

The article says that China's labor costs alone will rise to 69 percent of US costs in some regions before logistics, duties, inventory, and other costs. Keep in mind that if this is the case, then there will be less incentive for US companies to contract with Chinese firms for long-term commitments unless the costs of services are guaranteed to hold steady over the life of the contract.

Factor in the fact that workers in the United States are much more productive than their Chinese counterparts and the higher productivity per hour worked begins to be quite significant in the analysis. For instance, according to the BCG report, China's productivity was just 29 percent of that of the United States in 2010. With BCG predicting China's productivity will rise to around 38 percent by 2015, that takes the working hour equivalency number to more than two hours of pay in China for every hour paid in the United States.

So simply speaking, even if China, with all of the anticipated work forces supplemented with robots, yields a top end productivity of 50 percent relative to the US, it means Chinese wages would have to be twice as much as they are now to erode its competitiveness. At 38 percent predicted, almost three times the current wage would be paid out to extract the same amount of work now yielded by the US.

Foxconn pays about $28 per day for a worker with at least two years on the job. Let's boil that down to $2.80 per hour for a 10-hour day. Now we need to multiply that by three to get our real equivalency wage here in 2012. So dollar for dollar, US vs. China, for the same work, the US is covering the cost of Chinese labor at $8.40 per hour. This is before freight, duty, taxes, and other logistics. To be fair, we have to look at the carbon footprint costs that may eventually be levied against US firms for fossil fuel emissions from the various overseas transportation modes.

New analysis from the Boston Consulting Group (BCG) suggests that the move offshore to China by US companies in search of lower labor costs may slow significantly over the next few years and even reverse course, as rising wages in China will make it more costly than the US in four years, when productivity differences are factored in.

As the wage gap with China shrinks and certain US states become cheaper, we will see manufacturing responding to the fiscal pressures by bringing the work back home. Europe will not be so fortunate, and will continue to lose manufacturing to more cost-effective Chinese sources due to higher labor costs there than in the US.

BCG claims that the two biggest drivers of cost increase in China are the appreciating Yuan and higher wages. To quote directly from the article:

With Chinese wages rising at about 17% per year and the value of the Yuan continuing to increase, the gap between US and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states — including Mississippi, South Carolina, and Alabama — increasingly competitive as low-cost bases for supplying the US market.

BCG predicted that labor costs in the US will only grow about 3 percent in the period from 2010 to 2015, to just over $26 per hour on average, while wages in China will increase between 15 percent and 20 percent each year.

To conclude that the United States will be more competitive than China by 2015 may seem like a stretch, but the middle class in China is expanding, bringing along with that growth an increasing demand for US-made goods. We should see more of a trade balance as we increase our exports and China cuts back on their exports to the United States due to higher labor cost factoring into their end product wholesale and retail cost. Money earned and spent in the United States will be used to build more efficient manufacturing operations with innovative robotics and cutting-edge technologies. Our productivity rates will continue to increase while China's labor cost continues to rise, making them less competitive overall.

In the next article, I will track BCG's prediction from 2011 to today. If we look at the vital statistics and they prove to be indicative of a strong motivation to bring manufacturing back to the US, we may see the other ancillary business functions like HR and tech support come back as well. That will mean more jobs coming back and that can only be good for our ailing economy.

15 comments on “Reshoring the US Economy

  1. Mr. Roques
    November 29, 2012

    When you factor in the cost of transportation, added costs of customs, time, and even the cost of having such a high time-difference, how close is it? 

    Also, it's simpler for a new company to make the decision, but what about a company that's already in China, how much will it cost to move back to the US?

  2. dalexander
    November 29, 2012

    @Mr.Roques…I think those may be rhetrorical questions as depending how invested a company is in the off shore manufacturer, will determine how costly and complicated things are bringing back home. Transportation is s moving target with sur charges for fuel, import and export tarriffs, and fluctuating money values. The general consensus is that China with its escalating labor cost will soon reach parity with the US labor cost in some states. If it takes a company two to three years to bring everything back home, that may be the right timing. We just have to watch what happens with the big players because they will exercise whatever leverage they have with their existing contractors before pulling up stakes. Either way, there is some pain for someone in the not too distant future.

  3. _hm
    November 29, 2012

    Very encouraging news. How can this be accelerated? We like reshoring to move much quicker. Another question is – will USA be ready and prepared for this opportunity? I wish they better work hard this time, without unions.

     

  4. SP
    November 29, 2012

    One question will China's max wages be ever more than USA worker's minimum wages?

  5. dalexander
    November 29, 2012

    @_hm…There is the sticking point. Will unions play to win or will they hold the company hostage to higher wages? n these economic times, my guess is that if jobs return, most be will be happy to work for anything that exceeds unemployment if the wage covers transportation to and from work, and any other incidentals that impact the working family because they are working.

  6. dalexander
    November 29, 2012

    @SP…I think things are moving that way. China needs to create huge incentives to get people to save less and consume more. That means that the government will be doing their level best to provide a sense of security for the entire population. Social Security, Helath Care, Pensions, and the like are all on the table including a redistribution of the 3.6 trillion dollar surplus that would fund various programs to encourage blue collar workers to pursue their dreams as well. If the standard of living is going to rise in China, it will rise universally and that means everyone's wages will go up and continue to go up as long as the GDP supports the numbers. With 25% debt to GDP and the multi-trillion dollar surplus, China is on track for at least 8%-10% growth year-over-year. The middle class will expand via blue collar workers enjoying their share of the development. 2020 will still be a developing time for China, but by then, they will have wages that will not be competitive with the US as we have a 16 trillion dollar deficit today, a trade imbalance that is growing, and a jobless rate that is scarey of the map. with a 103% debt to GDP, we may have already passed the point of no return unless we get the jobs back, increase our productivity significantly, and get rid of politicians and lobbyist working for the self-serving corporations. We got what it takes, but the government's partisan policies and corporation friendly biases are taking what we got. The rich get richer and the gap is widening every day.

  7. Mr. Roques
    November 30, 2012

    Although, we must remember that wages in those states are so low because: there are no jobs. Once a company gets there, and another, those employees will start to compare themselves, but not to China, but to the other states.

    That's something that is always going to happen.

    If it's not the US, and its not China… which country could take advantage of the situation? Any in the western hemisphere?

  8. sharonstarr
    November 30, 2012

    These are interesting findings, but they are limited.  One has to assess the global dynamics of reshoring to gain any insight about the potential impact on the USA.  Many global companies that are finding it less advantageous to operate in China are moving their operations to other Asian countries, such as Vietnam, where labor rates are lower and regulations less onerous.  IPC conducted a study of reshoring in the electronics industry earlier this year and found that much of the manufacturing returning from Asia is going to Mexico. The study is titled “On-Shoring in the Electronics Industry:Trends and Outlook for North America”. Information about it can be found at ipc.org.

  9. Taimoor Zubar
    November 30, 2012

    @Douglas: Apart from the upward pressure on wages due to the addition of medical, healthcare benefits etc, another reason is the rising inflation. The cost of living is going up in China which would impact the minimum wage rate as employees demand higher wages.

  10. Taimoor Zubar
    November 30, 2012

    @sharonstarr: I agree that China is not the only threat and other countries are becoming more powerful and are likely to pose threats too. I think the movement will be from one country to another and as the country develops, the price advantage will finish and it would no longer be attractive to produce anything in that academy. Countries like Vietnam will follow China till the point it's able to keep the costs low.

  11. itguyphil
    November 30, 2012

    Vietnam? Really.

    This might just be plain ignorance, but they have the capacity to create a manufacturing workforce to handle our demand needs?

  12. dalexander
    December 1, 2012

    @pocharlie…good question. Does anybody reading these posts have any experience with contracting in Vietnam? How would you rate their expertise?

  13. Barbara Jorgensen
    December 3, 2012

    These cost analyses always fascinate me. There's no question that productivity should be a major factor in the equation. I wonder, though, if we are really comparing worker productivity minus automation or including automation? Methinks that chnages the equation considerably.

  14. dalexander
    December 3, 2012

    @Barbara…I watched a video on robots being used currently at Foxconn. The workers were taking the output from the robots and inspecting, trimming off or cleaning and stacking and then reloading the robotic supply bins. Who is being automated. Check out a Netflix called “Plug and Pray.” It is an eye opener.

  15. itguyphil
    December 17, 2012

    It should. I mean, you'll end up paying less with automation right?

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.