Midwest Closes Business Cost Gap With the South
WSJ -- "The Midwest has largely closed the cost gap in competing for companies with the South, traditionally the nation's cheapest region in which to do business.
A gauge of Midwestern business costs—a mix of labor, energy, taxes and real estate—stood at 96% of the U.S. average in 2010, according to an index compiled by Moody's Analytics. That is barely higher than the South's 95% of the average—and the distance between the regions has narrowed sharply over the past decade.
For decades, the South's cost advantages, lack of widespread unionization and business-friendly laws have lured companies from Northern states as well as factories set up by foreign companies. As more employers in the South compete for workers, and as workers there grow more skilled and productive, wages have risen.
While the South is still cheaper, it "is becoming more expensive because of their success," said Tracey Hyatt Bosman, managing director and leader of the Midwest practice at Biggins Lacy Shapiro, a site-location consultancy."
Case in Point:
"As part of a recent expansion, Bassam Homsi, president and founder of Ohio-based Autotool, Inc. —which helps manufacturers retool assembly lines as they update products and processes—looked at moving his headquarters to Alabama to lower costs and be closer to Southern customers. Mr. Bomsi said he found electric power there was about 30% more expensive, and that labor, while cheaper overall, wasn't much less expensive for the engineers and other skilled workers he needs most.
"We looked at the utility cost and the labor cost. From the nonskilled labor side, it's about 70 cents on the dollar in Alabama versus Ohio," Mr. Homsi said. "But when it comes to skilled labor, there are a lot of multinational companies that have set up shop, and they offer a very rich compensation package that midsize companies can't compete with. If you take skilled labor and add all the hidden costs, it was probably more expensive down there," he said."
MP: A few comments.....
1. It wasn't specifically mentioned in the article, but I would think that the new two-tiered wage structure for unionized workers in the automotive, steel and tire industries has to be a major factor in reducing labor costs in the Midwest. Manufacturing companies can hire new workers today at wages that are 50% less than several years ago, and that 50% savings on labor costs for new workers can play a significant role in reducing overall production costs.
2. The fact that wages and other costs are rising in the South as a result of its past success in attracting businesses is similar to the situation in China, where wages and other costs are rising as well as a result of its past success at attracting outsourced production to take advantage of its low-cost labor. And just as China has lost some of its previous cost advantage, so has the South lost some of its previous cost advantage.
Result? Manufacturing is moving back to the U.S. from China, and perhaps manufacturing will return to the Midwest from the South.
HT: John Sturges