Articles / Rubric: Global

Sometimes They Return
September 2013 | Global

More and more American companies are bringing their manufacturing back home from China. A trend like this is unlikely to be based on a sudden surge of patriotism, but rather due to the rising minimum wage in China and the studies showing that consumers are willing to pay more for goods that are “made in the USA.” For more than ten years, American companies were building new factories in China. The cheap labor, the huge and rapidly growing domestic market, an artificially low currency, and the government’s policy for attracting foreign investments all made China the major export center for the North American market. But economic prosperity in China led to a rise in the standard of living and, correspondingly, to an increase in the minimum wage.

Moreover, high unemployment in the U.S. has resulted in people ready to work for less pay, especially in the southern states. And the threat of jobs being outsourced keeps average wages relatively low for the American worker. These factors, combined with a high level of technology and employees, make the U.S. one of the best places to manufacture a number of goods. According to The Boston Consulting Group (BCG), the following industries have the best prospects for returning manufacturing to the U.S. that was moved abroad from 1990-2000: transport, computers and electronics, metallurgical production, machinery and equipment, appliances, and furniture. Manufacturing of labor-intensive goods made in large quantities like clothing, shoes, and toys should remain in China.

A survey of American manufacturing companies from April 2012 by the BCG showed that 37% of companies with annual sales of over $1 billion are planning or are actively considering moving their production facilities from China to America. Among the largest companies with sales of more than $10 billion, that number is even higher (48%). The most common reason for this, according to the researchers, is the rise in the cost of Chinese labor. Research done by the Massachusetts Institute of Technology turned up similar results in 2012, when it analyzed 108 American firms that manufacture overseas. It was found that 14% of companies have concrete plans to move production back to the U.S. and another third are actively considering such a move.

Most important, though, is the rapidly growing demand for products labeled “made in the USA,” especially since many Americans became unemployed during the recession. Moving production to the U.S. involves the creation of new jobs and hence a decrease in unemployment. The Boston Consulting Group states that by 2015, re-industrialization will create 2-3 million new jobs in the U.S.

The BCG conducted a survey of 5,000 consumers in the U.S., China, Germany, and France with the goal of finding out their consumer preferences. More than 80% of Americans said they prefer goods made in the U.S. and are ready to pay from 10-60% more for them. Most surprisingly, more than 60% of Chinese consumers also said they would be willing to pay more for goods made in the U.S.

A number of companies, from small manufacturers to industry giants like Apple and General Electric, have already returned their factories to the U.S. The Emerson Corporation moved its factories from Asia to Mexico and North America in order to be closer to their customers. Swedish maker of home products IKEA opened its first factory in North America as a way to reduce transportation costs. The Desa power tools maker returned its production from China to America because the savings in transport in raw materials compensate for the higher cost of American labor.

Most multinational corporations, however, are only returning manufacturing to the U.S. of those products intended for the domestic American market. Thus, the amount of foreign manufacturing is still noticeably higher for most American companies than the amount of capacity they’re bringing back.  Caterpillar, for example, is opening a new factory to manufacture earthmovers in Texas, while at the same time announcing that it will expand its research and development in China.

The redistribution of global manufacturing, or in other words re-industrialization, is only now in its earliest stages and will most likely vary greatly from industry to industry depending on labor intensity, transportation costs, the competitive advantages of China, and the strategic needs of individual companies.

China Is Not So Cheap

Ten years ago, the average wage for a factory worker in China was 58 cents an hour. Today, Chinese workers have to be paid $3.00 and forecasts show that number increasing to $6.00 per hour by 2015. While this figure is much lower than the minimum wage in the U.S., if you factor in productivity, the cost of Chinese labor doesn’t look so low. According to the BCG, American workers paired with American technologies are three times more productive than their Chinese competitors.

Rising wages are also characteristic of other countries with low production costs. Thus, according to the International Labor Organization (ILO), real wages in Asia from 2000 to 2008 grew 7.1-7.8% annually. In advanced economies, according to data from the McKinsey Global Institute, workers’ wages for the same period grew annually by just 0.5-0.9%. The processing industry saw real wages decrease by 2.2% compared to 2005.

But this situation is best illustrated by the fact, that today, senior management salaries in companies based in a number of developing countries are on par with the income earned by their Western colleagues and even sometimes surpass them. Managers are especially costly in countries like Brazil, China, and Turkey.

In addition, the Chinese government set targets through to 2015 to increase the minimum wage by 13% every year. Meanwhile, strikes are becoming more frequent, forcing company leadership to meet the demands of Chinese workers and raise wages. For example, after the 2010 strike at Honda, wages were raised for employees at the China plant by 47%.

While businesses used to complain about the exorbitant demands by American workers, now there is discontent with Chinese workers who are constantly demanding higher wages and better working conditions. Along with Chinese workers having felt the lure of globalization came an unwillingness to work beyond the accepted Western norms. A new labor law introduced in 2008 expanded social protection to employees, giving them the right to sign permanent contracts after a year of work.

The situation faced by employers could be avoided by transferring production to other countries with lower production costs, for example, to Myanmar, Cambodia, or Vietnam. But the qualifications of the workforce and level of infrastructure in these countries are much lower than in China, which, in the long run, will also reflect on productivity.

U.S. experts say that the situation in China was the stimulus to re-industrialization. “The main reason that American companies are moving manufacturing back to the U.S. lies in the changing realities of the global economy and international trade,” says Walter Kremming, a senior analyst for Citigroup. “A major factor in China’s attractiveness for manufacturing and other emerging markets was the low wages, which aren’t as attractive as they were before. For more than 10 years, the average annual growth of real wages in the developing Asian countries has been 6-7%. Low-skilled labor is becoming more and more expensive and these countries are becoming stricter in their regulatory requirements for worker safety. It’s worth noting that the yuan has been nominally strengthening against the U.S. dollar and the euro, something long sought by American and European diplomacy. All of these factors have substantially reduced the competitiveness of the Asian economies where most of the production for the developed countries is concentrated. The second reason, though less significant in my view, is that the U.S. is still the main market for products produced by these companies. Thus, in light of consumers’ growing economic patriotism, it is profitable for American companies to position themselves as American manufacturers.”

Transportation costs also play an important role in the relocation of manufacturing. Increasing costs of maritime and railroad transportation, combined with increased wages, practically cancel out any benefits the companies had previously from manufacturing their goods in China.

If re-industrialization continues, the U.S. could soon retake a prominent place in the global economy as an industrial giant and a major exporter of goods. And it’s quite likely that this will happen: In 2012, exports reached record highs of $2.2 trillion, while the trade deficit continued to shrink. Today, thanks to new goods that are produced by factories that have been returned to the U.S., American exports have increased by 40-50% compared to 2009. Very impressive figures indeed.

Text: Olga Irisova

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