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US manufacturing tipped to bounce back: research

12 October, 2011

After years of decline, US manufacturing is set to rebound in the next five years, as China gradually loses its competitive advantage.

Transportation goods such as vehicles and automotive parts, electrical equipment including household appliances, and furniture are among seven sectors that could create 2 to 3 million jobs as a result of manufacturing returning to the US — an emerging trend that is expected to accelerate starting in the next five years, according to new research by The Boston Consulting Group (BCG).

The BCG analysis identifies those broad industry clusters that are most likely to reach a "tipping point" by around 2015 — a point at which China’s shrinking cost advantage should prompt companies to rethink where they produce certain goods meant for sale in North America.

In many cases, companies will shift production back from China or choose to locate new investments in the US. The US is also expected to become a more competitive export base in these sectors for Europe and Canada.

"A surprising amount of work that rushed to China over the past decade could soon start to come back—and the economic impact could be significant," Harold L. Sirkin, a BCG senior partner and lead author of the analysis, said.

"We’re on record predicting a US manufacturing renaissance starting by around 2015. Now we can be more specific about which industries will return and why."

In addition to transportation goods, electrical equipment/appliances, and furniture, the sectors most likely to return are plastics and rubber products, machinery, fabricated metal products, and computers/electronics.

Together, these seven industry groups could add $100 billion in output to the US economy and lower the US non-oil trade deficit by 20 to 35 per cent, according to BCG.

The tipping-point sectors account for about $2 trillion in US consumption per year and about 70 per cent of US imports from China, valued at nearly $200 billion in 2009. The job gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail.

"This does not mean that factories in China will close," Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas said.

"Instead, more of their output will be consumed in the fast-growing domestic market and elsewhere in Asia."

The research builds on an initial analysis that BCG released in May and further developed in an August report titled Made in America, Again: Why Manufacturing Will Return to the US. With Chinese wages rising at 15 to 20 per cent per year and the value of the yuan continuing to appreciate against the dollar, the report predicted that the once-enormous labour-cost gap between Chinese coastal provinces and certain lower-cost US states will shrink to less than 40 per cent by around 2015.

When higher US productivity, the actual labour content of a product, shipping, and other factors are taken into account, the cost advantage of making many goods in China that are bound for sale in the US will be marginal.
"That will make the US a much more attractive investment location for new factory capacity," Sirkin said.

The new analysis spells out what these cost swings will mean to specific industry clusters. Sectors like apparel, footwear, and textiles will remain largely offshore because China and other low-wage nations will still enjoy large cost advantages.

The biggest impact will be felt in sectors in which wages account for a relatively small portion of total production costs and in which logistics costs and other factors such as shipping time and distance are critical.
Some production migrating from China will go to Mexico, where labour costs will remain cheaper than in either China or the US. But not as much as one might think.

"America’s experience in these tipping-point sectors and its much larger pool of skilled workers, as well as logistical and security concerns, will make the US a better option for many companies," Justin Rose, a BCG principal and a co-author of the analysis said.

The changing economics of manufacturing are already showing up in trade data. From 2001 through 2004, imports from China grew by around 20 per cent per year. That growth rate has slowed dramatically, to only around 4 per cent in the past few years.

US imports from other low-cost nations have also flattened—and actually declined in 2009. The trend is especially pronounced in the tipping-point sectors.

"We are already starting to see some movement of production in these industries," Douglas Hohner, a BCG partner and also a co-author of the analysis said.

Recent moves by companies underscore the new manufacturing maths. Ford, NCR, Master Lock, high-end cookware maker All-Clad Metalcrafters, audiovisual equipment maker Peerless Industries, Chesapeake Bay Candle, and irrigation control maker ET Water Systems are among the companies that have recently shifted manufacturing of some items from China to the US.

Escalating Chinese wages aren’t the only reason. Electronics manufacturing services company AmFor Electronics, for instance, cited delivery responsiveness and ease of design revisions as reasons for relocating wire-harness production and some final assembly from China and Mexico to Portland, Oregon.

The BCG analysis is part of an ongoing study of the future of worldwide manufacturing that the firm’s Global Advantage and Operations practices are conducting. A formal report on the latest findings is expected in the coming months.

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RUSSELL JACKSON | Friday, October 14, 2011, 10:52 AM
Could some of this experience also help Australia retain or reclaim some Manufacturing, or would the economy-of-scale be too different? I would appreciate comment from one of your journalists. Regards, Russell Jackson
IndustrySearch Chris | Friday, October 14, 2011, 4:12 PM
Hi Russell, retain manufacturing yes I think so, reclaim is not so clear cut. I'm nervous about drawing comparisons not so much because of the economies of scale, as much as the causes and effects for heading to China in the first place. I also think we have to be careful to note the particular sectors of manufacturing that the US expects to rebound, and accept that we have, and had, very different manufacturing priorities, and therefore possible outcomes. Overall I would say "made in china inc" is still looking pretty strong to me.