Monday, May 09, 2011

Made in the USA, Again: Manufacturing Renaissance Is Expected As The Wage Gap with China Shrinks

CHICAGO, May 5, 2011 -- "Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world, according to a new analysis by The Boston Consulting Group.

With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. 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 U.S. market."

32 Comments:

At 5/09/2011 8:50 AM, Blogger Larry G said...

Sounds like the conventional wisdom of US Manufacturing jobs "gone forever" is premature?

 
At 5/09/2011 9:27 AM, Blogger morganovich said...

it's going to take a long time for $20/week in wages to catch up to $20/hr... (or a helluva lot more at many manufacturers, what's the hourly for a UAW worker?)

i agree that china has hit its lewis point and will see big increases in wages, bit even if wages triple and the yuan doubles in strength, they will still be MUCH lower than US wages.

and taking 17% gains and extrapolating them out indefinitely is a ridiculous assumption. only a consultant would be so divorced from reality.

wage growth will moderate and be constrained by productivity, cause capital substitution, etc.

 
At 5/09/2011 11:19 AM, Blogger Benjamin said...

I happen to have a small woodworking facility in an industrial section of Los Angeles. Several of my industrial neighbors have said they cannot source as cheaply from China as several years back, for cabinets, furniture and garments. They are looking elsewhere, and domestically.

China may be the last, great large and cheap manufacturing platform on Earth, and it will do a Korea or Japan--it won't be cheap much longer.

There are other manufacturing platforms, but likely not as cheap. India has too many regs, and human rights observations. Other countries are smaller or more corrupt.

Thailand should benefit mightily from a more-expensive China, both as optional manufacturing platform (the Japanese have announced they want 750,000 skilled Thai workers in the next 10 years for factories in Thailand) and a source of commodities for an industrialized China.

And the United States will benefit as well.

In 10 to 20 years, the world will be a different place. Again. For the USA, probably a much better place.

 
At 5/09/2011 11:45 AM, Blogger Michael Hoff said...

Morganovich,

It also assumes that trial lawyers, environmentalists and unions won't construct even greater barriers to manufacturing in the US.

 
At 5/09/2011 11:55 AM, Blogger morganovich said...

michael-

yup.

though in fairness, environmental regs in china are tightening and will likely continue to do so. environment behaves like a luxury good.

if we could get slip and fall lawsuits to catch in in chain, that would do untold damage...

 
At 5/09/2011 12:05 PM, Blogger t11s said...

This comment has been removed by the author.

 
At 5/09/2011 12:06 PM, Blogger Mr. Econotarian said...

This comment has been removed by the author.

 
At 5/09/2011 12:07 PM, Blogger Mr. Econotarian said...

We should be clear that the true competition is not just China vs. US labor costs, but China vs. US labor costs + China vs. US labor productivity due to capital. Generally the US still has a leg up on worker productivity due to automation & robots.

The head of China's Foxconn recently said he would be interested in opening a highly automated iPhone assembly plant in the US (as opposed to the largely non-automated plant in China), but was afraid to because of the uncertain nature of US federal & state regulation.

In the US, you could easily build a highly automated plant that could compete with a non-automated plant in China - if you avoid the "CNOOC/UNOCAL factor", "Dubai Ports World factor", and the recent "Boeing factor".

 
At 5/09/2011 2:16 PM, Blogger Benjamin said...

The Hong Kong-based Li & Fung, outsourcers, say China wages going up by 80 percent in next five years. And the yuan going up too.

Hello Thailand. Hello Los Angeles.

 
At 5/09/2011 2:52 PM, Blogger Orion said...

And some people think this is a good thing!

 
At 5/09/2011 2:53 PM, Blogger Orion said...

The Asian factories are mostly pushing for Vietnam to be the new source. Eventually, production will move to Africa.

 
At 5/09/2011 3:45 PM, Blogger juandos said...

"Sounds like the conventional wisdom of US Manufacturing jobs "gone forever" is premature?"...

Interesting question Larry G...

From the Financial Times: Multinationals Dump U.S. Workers for Foreign Labor

Companies with fewer than 50 employees account for 84 percent of job gains.

From 1999 to 2009, U.S. multinationals cut U.S. jobs by 2.9 million.

Productivity gains account for 88 percent of of the growth in U.S. production.

 
At 5/09/2011 8:45 PM, Blogger VangelV said...

Wonderful news. American workers will get less pay than their Chinese counterparts. That might help attract some of the lower skilled jobs back into the US.

 
At 5/09/2011 8:53 PM, Blogger deb said...

"t's going to take a long time for $20/week in wages to catch up to $20/hr... (or a helluva lot more at many manufacturers, what's the hourly for a UAW worker?)"

Keep in mind that labor isn't the only factor. Getting your products to market is going to see a serious rise in the future as transportation costs continue to rise.

 
At 5/09/2011 9:22 PM, Blogger morganovich said...

"Getting your products to market is going to see a serious rise in the future as transportation costs continue to rise."

transport costs are a tiny part of the retail price of items.

we can ship a kiwi from new zealand to california and still sell it profitably at wholesale for 12 cents.

they are far more that offset by our higher regulatory, legal, and other costs.

 
At 5/10/2011 5:38 AM, Blogger tom said...

morganovich,

Multiply your $20/week by 10-20 times and you have wages in china in places like Shenzhen where manufacturing is done.

 
At 5/10/2011 6:15 AM, Blogger Shane Leavy said...

Might not industry simply shift to other low-wage countries? Surely there are other countries in Asia, Latin America and Africa besides China, ready to accept industries looking for cheap labour?

 
At 5/10/2011 8:18 AM, Blogger VangelV said...

it's going to take a long time for $20/week in wages to catch up to $20/hr... (or a helluva lot more at many manufacturers, what's the hourly for a UAW worker?)

As part of her compensation package my AA in China received a nice new condominium with subsidized utilities, free health care, daycare, insurance, and subsidized tuition for her son if she needed it. When adjusting for after-tax purchasing power she was getting a better compensation package than her counterpart in Canada.

And anyone who has ever been to China and seen the large homes in the countryside that were built by sweatshop workers who were employed by the likes of Nike, Columbia, etc., knows that the $20 myth is groundless.

 
At 5/10/2011 8:22 AM, Blogger VangelV said...

Might not industry simply shift to other low-wage countries? Surely there are other countries in Asia, Latin America and Africa besides China, ready to accept industries looking for cheap labour?

That is true but it is still expected that US compensation will have to fall significantly. And if the regulatory environment is fixed the US could get some of those low skilled jobs back. Of course, that would be a step backwards because it would signal a decline in the standard of living but that is a subject for another thread.

 
At 5/10/2011 11:08 AM, Blogger morganovich said...

vangel-

"According to research published in the Monthly Labour Review of the US Bureau of Labour Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe."

81c an hour is still not even 1/10th of us rates.

even if it is more like $1 now, you are still talking about $40/week in wages.

my cleaning people get $30/hr. a line worker at GM gets what, $70-90?

i think you are using a couple of unrepresentative anecdotes to distort the overall picture.

average chinese workers make less in a week than a UAW worker does in an hour.

 
At 5/10/2011 11:14 AM, Blogger Larry G said...

I think the fact that BMW, Toyota, Hyundai and others are willing to put plants in the US right now should tell us that we are, so far, still in the running for some kinds of manufacturing.

 
At 5/10/2011 11:34 AM, Blogger VangelV said...

"According to research published in the Monthly Labour Review of the US Bureau of Labour Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe."

But this is nonsense. As I pointed out to you, many manufacturers offer housing, utilities, health care, insurance, day care, and other benefits that are NOT counted by the BLS, which sees what it wants to see. And any number it comes up with is after all taxes, pension contributions, etc. Take those out of the American pay and see what you have left over. Then take out the housing, health care, utilities, daycare costs and see what is left over. And after you have done all that go and see how much what you get will purchase and then compare the standard of living.

81c an hour is still not even 1/10th of us rates.

But as I pointed out above, you are missing the free or subsidized housing, utilities, daycare services, insurance, etc., etc., etc., that most mid and large manufacturers offer to their employees. Or the fact that your one hour of labour is sufficient to buy you a liter of beer and a nice lunch at an ordinary sit-down restaurant. Adjust for all of the factors and you will find that Chinese workers are not as cheap as you make them out to be.

my cleaning people get $30/hr. a line worker at GM gets what, $70-90?

I would say that the total compensation cost for a GM worker would be close to $75. But that does not mean that after you account for all of the taxes, contributions, fees, work related expenses, etc, the GM worker gets a much better lifestyle than the GM worker in China.

Keep in mind that what you would consider a low skilled garment worker in China can earn enough to build a house and pay for it in cash. I know this because I used to drive past the large homes in the countryside and wonder how the hell someone who supposedly made so little money can afford to build them. The answer was simple; their compensation was a lot higher than was being reported.

i think you are using a couple of unrepresentative anecdotes to distort the overall picture.

average chinese workers make less in a week than a UAW worker does in an hour.


If you don't count the value of the housing, utilities, insurance, etc., you are right. But if they are paid so low why do they have more in savings than your average UAW employee?

 
At 5/10/2011 12:17 PM, Blogger Benjamin said...

my cleaning people get $30/hr

What?

Cash?

Can I clean you house?

 
At 5/10/2011 12:20 PM, Blogger Larry G said...

who pays the cleaning people FICA taxes?

 
At 5/11/2011 8:50 AM, Blogger morganovich said...

vangel-

fine, add in the daycare etc and dorm housing. but then add in the UAW healthcare and pension as well.

i doubt you're going to come out ahead there.

you know how cheap a house is in detroit right now? i'm not sure it's far off the chiina scale and may be even cheaper relative to wages.

do you have some data on this "chinese worker has more savings that a UAW one?". perhaps thay have a higher savings rate, but in actual nominal terms, i find that very difficult to believe.

 
At 5/11/2011 8:53 AM, Blogger morganovich said...

fica taxes for my cleaners are paid by the cleaner. they are a business. i pay them for service, they pay all their own taxes. i am their customer, no their employer.

benji-

yes, $30hr. i pay $240 for a crew of 2 to work 4 hours. (it's a big house. they do really well to get it done in 4 hours)

sorry, the position is filled.

 
At 5/11/2011 10:12 AM, Blogger VangelV said...

fine, add in the daycare etc and dorm housing. but then add in the UAW healthcare and pension as well.

i doubt you're going to come out ahead there.


First of all, it is not all dorm housing. Having been to China and gone to many individual homes and apartments I can tell you that many of the workers live a lot better than you think.

And while I do recognize the value of pensions and healthcare for UAW workers it is also clear that Chinese workers get those as well. And, unlike the UAW pensions, the Chinese pensions were not in danger of being wiped out and requiring a bailout from the government. Also, Chinese workers are not dumb enough to believe that pensions will protect them from losing purchasing power.

That is why they buy the housing that they live in and avoid mortgages. It is why they save, invest in other businesses and look for additional income streams.

you know how cheap a house is in detroit right now? i'm not sure it's far off the chiina scale and may be even cheaper relative to wages.

But in China you do not have to live next to a crack house or worry that the police will raid your home and shoot you if you resist. Cheap housing is great if you can live in it and if it will not fall in price over time.

do you have some data on this "chinese worker has more savings that a UAW one?". perhaps thay have a higher savings rate, but in actual nominal terms, i find that very difficult to believe.

Didn't someone here quote the Bill Bonner commentary in which he pointed out that the average working family had more in debt than their assets were worth? Why do you think all those bankruptcies and foreclosures are taking place? Add the value of the deferred taxation (due to the debt plus unfunded liabilities) and you see just how terrible the picture is.

 
At 5/11/2011 1:07 PM, Blogger morganovich said...

"or worry that the police will raid your home and shoot you if you resist. "

you cannot seriously be making this argument. try blogging about politics from your chinese abode and see who kicks in your door.

you are once more using unrepresentative anecdotes in the place of an actual argument.

i too have been to china and seen where the workers live. roll over to foxconn and see how you like the housing. you seem to be confusing the homes of knowledge workers and managers with those of the guys on the assembly lines.

"Didn't someone here quote the Bill Bonner commentary in which he pointed out that the average working family had more in debt than their assets were worth?"

i don't know. you are the one making the claim. it falls to you to provide evidence.

"That is why they buy the housing that they live in and avoid mortgages"

um, no. they don't get mortgages because they are not available. when they become available, property values will quadruple in a few years just as they did in russia or leabnon.

"And, unlike the UAW pensions, the Chinese pensions were not in danger of being wiped out"

and this is full blown nonsense, particularly at the GSE's. those are pure employment factories and will depend entirely upon subsidy and free loans. this is true of a great many chinese entities whose margins suck and who will be in real trouble in a few years as their costs spike and competition intensifies. you also run the very real risk that the company you work for is an accounting fraud.

i would much rather have a pension from ford tan most chinese companies.

 
At 5/11/2011 1:10 PM, Blogger morganovich said...

the only reason the chinese companies do not have serious pension shortfalls is that they are paying so few right now.

everyone is paying in and no one is collecting. but many companies are radically underfunding pensions and making extreme assumptions about rate of return.

let's see how they do once they have a serious crop of retirees to pay.

 
At 5/18/2011 8:46 AM, Blogger VangelV said...

you cannot seriously be making this argument. try blogging about politics from your chinese abode and see who kicks in your door.

You are right about this. The CP does not want any competition when it comes to politics. But, unlike in the US, China is a lot more lax on other matters. The police do not usually carry guns and do not have the cowboy attitudes that lead to so many murders of innocent people. The US drug war has placed a massive burden on the American taxpayer and the meddling government has destroyed many families for no reason.

i too have been to china and seen where the workers live. roll over to foxconn and see how you like the housing. you seem to be confusing the homes of knowledge workers and managers with those of the guys on the assembly lines.

The last time I looked Foxconn had little trouble attracting workers. The living conditions offered by the company were much better than the conditions that most of its workers lived in before they got hired. While there are some issues with the company as there are with any large outfits in most countries Foxconn has been a net benefit to Chinese workers and their families.

Of course, because Foxconn does not pay very well in comparison to many other companies it probably has quite a bit of turnover for skilled positions. While it may be a big step up for rural workers without prospects I doubt that many people who live in China's cities would want to work for the company.

i don't know. you are the one making the claim. it falls to you to provide evidence.

True. I will find the exact reference to Bonner when I get a chance to go over some of my notes. I assume that it came from one of his postings on the Agora site and that it is also a part of one of his books. I will take a look at my notes and provide the exact wording when I find it. But let me leave you with this piece, which makes a similar point about American debt. But the math is simple. The average American taxpayer owes several thousand dollars as his share of the government debt, including unfunded liabilities promised to Medicare and SS. Add to consumer and mortgage debts and an average savings of approximately $350 a year and you can't make the math work.

That is the big difference between many developing world countries and the US. In places like China debt is used to build housing, infrastructure, and factories. Those assets can generate income to pay off debts. But in the US debt has been used for consumption and to fund useless activities like wars or nation building projects abroad.
Those activities do not create future income but consume future tax revenues until all 'investments' were written off.

 
At 5/18/2011 9:09 AM, Blogger VangelV said...

um, no. they don't get mortgages because they are not available. when they become available, property values will quadruple in a few years just as they did in russia or leabnon.

First, you can get mortgages. Second, housing prices have quadrupled already and there is an evidence of a bubble at this time. Many 'investors' will take a bath and will suffer huge losses. But most of the units will remain in place and will be used by people who buy them at a lower price.

The Chinese have avoided mortgages because they do not trust the government or even their employers to provide them with income when they retire. They have avoided long term debt except as a hedge against a loss of purchasing power.

Having been conditioned by history, the Chinese know that disasters are far more common than many suppose and have a tendency to expect what we would consider to be black swan events. That is why they save as much as they do.

and this is full blown nonsense, particularly at the GSE's.

But it is not nonsense. The US defined benefit pensions are in huge trouble because of negative returns on past investments and poor economics. Had the government not intervened most pensions in the auto sectors would have defaulted and we would have seen a massive reduction in payments to retirees as the government took over the obligations.

When a Chinese company promises an employee a housing unit for life it allows that employee to possess that housing unit. If the company goes under the employees still live in the housing units. Their major difference will be the amount that they have to pay for utilities and maintenance as the company provided subsidies go away.

And let me point out the obvious. Chinese do not really trust that pensions will be in place forever. That is why they save so much and live well below their means. That is a huge difference.

 
At 5/18/2011 9:09 AM, Blogger VangelV said...

those are pure employment factories and will depend entirely upon subsidy and free loans. this is true of a great many chinese entities whose margins suck and who will be in real trouble in a few years as their costs spike and competition intensifies. you also run the very real risk that the company you work for is an accounting fraud.

I fully agree here. So do the employees of those companies. Which is why they have taken steps to protect themselves against a collapse. That is one thing that Americans have failed to do because they have been conditioned to think that their government and companies will always step in and make good. The Chinese are far more self reliant and aggressive about personal responsibility than Americans.

i would much rather have a pension from ford tan most chinese companies.

Possibly. Ford pensions will be supported by the company's Chinese activities for years to come. That is why more and more Ford jobs will be created abroad. But if prices of gasoline explode Ford may find it impossible to compete against players like Kia, Hyundai, or their Chinese counterparts and domestic pensions would be in trouble again. I would have felt much better about Ford if the government had not forgiven the debts of its domestic competitors and kept them from being liquidated.

But on this I am with Jim Rogers. Yes, China will go through massive turmoil over the next fifty years. But its people are hard working and ambitious. Like the US in the 19th century, they will overcome the setbacks even if China splits up into a number of parts.

At the same time, the US is in a severe decline that will take a revolution to overcome. Unless you are calling for independents to line up behind a Ron Paul type of candidate and marginalize the big-government Democrats and Republicans who dominate the debate there is no hope of a reversal until after a severe crisis destroys much of the economy. While that could take any time, there are many tools available to the Fed to prevent such an outcome for a while. It is possible that things will get worse and worse as the authorities engineer various dead cat bounces and Americans see nominal prices for their houses and equities rise to high levels. If the bubbles get too big the reversal may not come peacefully and not be led by reasonable people who argue for liberty. Your next 'great leader' may be a totalitarian type who makes Bush/Obama look like geniuses. Sorry but if I have to make long term bets I would avoid the United States. It used to be and can be the greatest nation in the world but it has a long way to go before it becomes that again.

 

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