The tide is turning on American manufacturing. After years of off-shoring their manufacturing operations, companies are bringing long-shuttered US factories back to life. The reasons for this renaissance are many, though most experts widely credit three things as the leading factors: a shrinking wage gap, greater productivity among US workers, and a stronger Chinese currency.
China’s wages are rising because of a desire to improve the living standards of Chinese workers and a tightening of the skilled labor force in China. At the same time, US labor costs have flattened and are even declining as workers have lost bargaining power in a weaker, more global economy. This increase in Chinese wages from 60 cents/hour a decade ago to $6 today is now only four times less than a US worker whose fully weighted cost (wages + benefits) is somewhere between $24 and $26 dollars per hour.
On top of a shrinking wage gap, the US is seeing increased productivity. Beginning in the late 1970s when manufacturing employment began to decline, a funny thing happened. The amount of product coming out of US factories started to rise. Between 1977 and 2010, manufacturing output more than doubled. US workers became more productive thanks to investments in training, equipment, and technology.
Think of all the changes that have occurred in the American office since 1977 when computers weren’t found on every desk. Automated products, smartphones, and videoconferencing equipment have all helped US workers become three times more productive than their Asian counterparts, a trend that continues today. Bottom line, companies manufacturing in the US need fewer workers to produce the same amount of work.
Another factor impacting the economics of manufacturing here versus China has to do with the Chinese Yuan. The Yuan is at its highest level in nearly two decades, which means that Chinese products cost more. So, while it’s still less expensive to manufacture products in China, the savings aren’t as great as they once were. Instead of costing a quarter or a third of what it costs here, a 2011 report by the Boston Consulting Group projects that by 2015, manufacturing in China will only be 10 percent to 15 percent cheaper than in the US, and this is before “soft” costs are considered. When you consider things like the cost of managing the supply chain and transporting product from half a world away, along with the intellectual property risks inherent in manufacturing overseas, the argument for US manufacturing starts to look pretty strong.
The picture looks brighter still when you look at energy prices. The emergence of shale gas on our shores is helping to lower energy costs. This is a great advantage to industries with a high energy component in their product costs, such as steel and petrochemical producers. However, it also has the benefit of lowering energy bills for all companies, which, when combined, equals a $1 billion per day advantage.
Then there are the “costs” no one even considered, but which are real, as outlined in a recent article from The Atlantic. The Atlantic article examined the surprise discovery made by workers at General Electric’s sprawling “Appliance Park” campus in Louisville, Kentucky. In the 1960s and early 70s, the park was a bustling center of manufacturing activity. Nearly 25,000 people worked there. There was so much action, traffic lights were needed to control cars during shift change in the parking lot. Then, as happened at factories around the country, GE began sending those jobs offshore to China and other developing countries. By 2011, fewer than 2,000 jobs remained in Louisville.