Reshoring from China to America gains momentum
By Nancy J. Gonzalez
The wages in China are more expensive than a decade ago and might continue on the rise in the upcoming years. Also, some other costs associated with manufacturing are increasing in Asia while some regions in the U.S. become more competitive. As a result, reshoring – bringing production back to the U.S. – is an option many manufacturers are considering to reduce costs and to be near their customers in North America. And Mexico will benefit from this trend.
A new Boston Consulting Group (BCG) survey says 17% of manufacturers are moving operations back to the U.S., up from 13% in 2013. Also, in the BCG survey of executives, the U.S. has surpassed China as the most likely destination for new factory capacity for goods sold in the U.S.
The survey shows 31% of the executives with at least US$1 billion in annual revenue said they are most likely to locate such facilities in the U.S. within five years, up from 26% in 2013. Just 20% would choose China, down from 30% two years ago.
The reshoring trend began more than five years ago, partly reversing a decades-long offshoring movement to take advantage of low foreign wages.
According to the study “Made in America, Again”, published by the Boston Consulting Group, wage and benefits increases of 15 to 20% per year in China.
As shown in Exhibit #1 from 2000 through 2005, pay and benefits for the average Chinese factory worker rose by 10% annually. From 2005 through 2010, wage hikes averaged 19% per year, while the fully loaded cost of U.S. production workers rose by only 4%. The last few years have been especially volatile in China, the BCG analysis shows.
BCG´s research indicates the fully loaded cost of Chinese workers in the Yangtze River Delta will rise by annual average of 18% to about US$6.31 per hour. This region is the highest manufacturing output in the country and is the heart of the high –skilled industries as automobiles and electronics.
But wages are not the only factor to move production back to the U.S. According to the BCG study, in China, the cost of electricity has surged by 15% since 2010. In addition, industrial land is no longer cheap in China and nowadays is even more expense than in some cities in the U.S.
While in Ningbo industrial land costs US$11.15 per square feet, US$17.29 in Shanghai and US$21 in Shenzhen, in Alabama it costs only US$1.86 to US$7.43 per square foot. In Tennessee and North Carolina the price ranges from US$1.30 to US$4.65.
Transpacific shipping rates are going up, too. While ocean freight remains inexpensive, the doubling of bunker-fuel process since early 2009 is causing rates to increase.
“There are the many costs and difficulties of relaying on extended supply chains. These include inventory expenses, quality control problems, unanticipated travel needs, and the threat of supply disruptions due to port closures or natural disasters. Also the rising concerns about intellectual – property theft and trade disputes in China result in punitive duties,” the study says.
The future of manufacturing in China
But reshoring does not mean manufacturing in China will be deeply hurt. Rising income levels in China and the rest of developing Asia and demand for goods in the region will increase rapidly. Multinational companies are likely to devote more of their capacity in China to serving the domestic Chinese as well as the larger Asian markets, and bring production work for the North American market back to the U.S.
Manufacturing of some goods will shift from China to the nations with lower labor cost, such as Vietnam, Indonesia, and Mexico. But these nations´ ability to absorb the higher – end manufacturing that would otherwise go to China will be limited by inadequate infrastructure, skilled workers, scale, and domestic supply networks, as well as by political and intellectual property risks. Low worker productivity, corruption, and the risk to personal safety are added concerns in some countries, indicated the BCG study.
“This reallocation of global manufacturing is in its very early phases. It will vary dramatically from industry to industry, depending on labor content, transportation cost, China´s competitive strengths, and the strategic needs of individual companies,” the BCG study explains.
The authors of this study, Harold L. Sirkin, Michael Zinser and Douglas Huhner expressed that while China will remain an important manufacturing platform for Asia and Europe, the U.S. will become increasingly attractive for the production of many goods sold to consumers in North America, even more than Mexico.
Certain U.S. states such as South Carolina, Alabama, and Tennessee will turn out to be among the least expensive production sites in the industrialized world. As a result, some companies might begin building more capacity in the U.S. to supply North America. The early evidence of such a shift is mounting.
Cost of production for many products will be only 10 to 15% less in Chinese coastal cities than in some parts of the U.S. where factories are likely to be built, the BCG study states.
The impact of the changing cost equation will vary from industry to industry. Products in which labor accounts for a small portion of total costs and in which volumes are modest, such as auto parts, construction equipment, and appliances, will be among those that companies reevaluate in terms of their options for supplying the North American market.
But the manufacture of goods with relatively higher labor content that are produced in high volumes will likely remain in China. Finally, companies that make mass- produced, labor – intense products, like apparel and shoes, may move production from China to other low –cost nations.
Even though governments in Asia and Europe have used generous financial incentives to persuade multinational companies to build high-tech plants in targeted industries, in recent years, the federal government and many states have closed the gap with aggressive incentive packages, making the U.S. more competitive in the chase for manufacturing facilities.
The study concludes that when it comes to building new production capacity, companies will likely choose to explores alternatives instead of automatically opting for China.
Mexico as an option to manufacture
Mexico´s location is an advantage to manufacture to the North American market, but companies are opting to install new operations on U.S. low cost cities.
According to the BCG study: “Mexico, on the other hand, has the potential to be a big winner when it comes to supplying North America. It has the enormous advantage of bordering the U.S., which means that goods can reach much of the country in a day or two, as opposed to at least 21 days by ship from China. Goods imported from Mexico can also enter duty –free, thanks to the North American Free Trade Agreement.”
“In addition, by 2015, wages in Mexico will be significant lower than in China. In 2000, Mexican factory workers earned more than four times as much as Chinese workers. After China´s entry into the WTO in 2001, however, maquiladora industrial zones bordering the U.S. suffered a large loss in manufacturing. Now that has changed. By 2010, Chinese workers were earning only two –thirds as much as their Mexican counterparts. By 2015, BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25% higher than the cost of using Mexican workers,” the BCG study says.
Mexico´s gains will be limited, however, especially in higher-value work now done in China. Because of concerns over personal safety, skill shortages, and poor infrastructure, many companies will keep manufacturing high-end products in the U.S., the study concludes.
To summarize, American manufacturers face some headwinds in the short-term. The executives surveyed by the BCG believe U.S. production capacity will comprise a slightly lower share of their global capacity than they estimated for 2014. Furthermore, falling oil prices have hurt energy investment this year and a strong dollar has made U.S. goods more expensive overseas.
Lower automation costs and advanced manufacturing technologies also are making the companies more amenable to investing in the U.S., the survey shows. Despite the spread of automation, half the executive still said they expect U.S. manufacturing employment to rise by at least 5% over the next five years as a result of reshoring.