Monday, March 07, 2011

Manufacturing in U.S. Makes More Sense Than In a Generation; China Not Such A Great Deal Any More

Here's an interesting article titled "Made in America: Small Businesses Buck the Offshoring Trend," about how some manufacturing is being brought back to the U.S. from China, especially for smaller American firms, because of: a) rising labor costs in China, b) inconsistent quality, c) shipping costs that have doubled in the last year (see chart above), and d) the lack of safeguards on intellectual property.  Here are some key paragraphs from an article that suggests that America's manufacturing sector can look forward to a bright, dynamic and thriving future:

"For U.S. firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and U.S. manufacturing is no longer as expensive. As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet.

When accounting giant KPMG International recently asked 196 senior executives to list their top concerns for 2011 and 2012, labor costs ranked below product quality and fluctuations in shipping rates and currency values. And 19 percent of the companies that responded to an October survey by, an online sourcing marketplace, said they had recently brought all or part of their manufacturing back to North America from overseas, up from 12 percent in the first quarter of 2010. This is one reason U.S. factories managed to add 136,000 jobs last year—the first increase in manufacturing employment since 1997 (see related CD post here).

The U.S. certainly isn’t on the verge of recapturing its past industrial glory, nor can every business benefit by fleeing China. But those that actually build tangible goods should no longer assume that “Made in the USA” is an unaffordable luxury. Unless a company is hell-bent on selling the cheapest goods possible, manufacturing at home makes more sense than it has in a generation.

China’s big manufacturing advantage has been cheap labor, but wages—while still low compared with those in the U.S.—have risen sharply in recent years (see chart below).

Manufacturing wages more than doubled in China between 2002 and 2008, and the value of the nation’s currency has risen steadily. It’s now under tremendous international pressure to let the yuan appreciate even more, and the country must cope with worrisome inflation at home (food prices rose by nearly 12 percent last year). And though Chinese workers still earn a fraction of what their American counterparts do, the rising costs of labor there are prompting companies to reevaluate their production strategies. Once they do, these businesses often realize something profound: China isn’t the great deal they expected."

Conclusion: "In dynamic systems such as supply chains, the tighter the connection between nodes, the lower the risk of something going haywire. That risk can be tolerated when the benefits of stretching the connections are too great to ignore. But when those benefits diminish, it’s time to consider building a system that is stable by design. And once America’s formidable innovation muscle is focused on keeping manufacturing nearby, new and inventive systems for reducing labor costs (see chart above)—without going overseas—will be developed quickly."


At 3/07/2011 5:16 PM, Blogger Sean said...

It's nice to see the world working the way one would expect it should.

At 3/07/2011 5:21 PM, Blogger Benjamin Cole said...

This is a fascinating commentary. My little furniture shop is next door to a guy who sources office furniture in China--and he says it is getting harder and harder. A garmento nearby says the same thing.

Also, look for a huge Japan-Thai alliance emerging soon. Technical skills, money and a good inexpensive work force combine well.

China is a fascist-commie nation, with virtually zero property or press rights.

Can they be flexible enough to adapt? Remember this is a country with a censored Internet, and in which even marching on the streets will get you thrown in jail or worse.

China needs to go many many miles more toward freedom and flexibility.

At 3/07/2011 6:10 PM, Blogger PeakTrader said...

Why Your World Is About to Get a Whole Lot Smaller
May 2009

"Distance will soon cost money, and so will burning carbon – both will bring long-lost jobs back home. We may not see the kind of economic growth that globalization has brought, but local economies will be revitalized, as will our cities and neighborhoods."

China's Growth: Too Good to be True?
04 February 2011

"If you think that China's double-digit growth is too good to be true, it probably is. Here are a couple of reasons why China's GDP could be smaller than it seems:

1. Environmental damage

He Ping, Chairman of International Fund for China's Environment, believes that China will have to spend at least 2% of its GDP per year to clean up 30 years of industrial waste.

2. Misallocated investments

If you invest $20, then you're expecting to get more than $20 in return...sometimes the returns actually turn out to be less than the cost of the investment...Some estimates say that up to 1-2% of China's current GDP growth can be attributed to this.

If you combine that 2-4% of GDP spent on cleaning up China's environmental waste and the 1-2% of growth attributed to misallocated investments, that'd mean that China's GDP could be overstated by roughly 5% each year."

At 3/07/2011 6:37 PM, Blogger PeakTrader said...

Also, I cited other factors before that not only reduce China's GDP growth (e.g. smaller gains-in-trade), but also result in harder work for GDP growth (e.g. deteriorating terms-of-trade).

Consequently, China's household consumption collapsed from 45% of GDP in 2000 to 36% of GDP in 2010.

At 3/08/2011 2:22 AM, Blogger juandos said...

"Consequently, China's household consumption collapsed from 45% of GDP in 2000 to 36% of GDP in 2010"...

Interesting comment PT and something I was wondering about...

I was thinking that the for awhile at least the Chinese GDP growth was outrunning Chinese household consumption...

Both measures were growing but the GDP was growing faster...

At 3/08/2011 8:58 AM, Blogger PeakTrader said...

Juandos, it seems, few people note the squandered resources in achieving high GDP growth. Most focus on the high output and ignore the wasted inputs (e.g. labor, capital, raw materials, land, energy, etc.).

Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis
January 22, 2011

As countries become more affluent, consumption tends to rise in relationship to GDP. And the ample evidence of colossally unproductive infrastructure projects in China raises further doubts about the sustainability of the Chinese economic model.

Household consumption has declined over the decade as a share of gross national product from a very low 45 percent at the beginning of the decade to an astonishingly low 36 percent last year.

It now takes $7 of debt to produce $1 of GDP growth...The combination of implicit debt forgiveness and the wide spread between the lending and deposit rate has been a very large transfer of wealth from household depositors to banks and borrowers. This transfer is, effectively, a large hidden tax on household income, and it is this transfer that cleaned up the last banking mess.

It did not result in a collapse in the banking system, but it nonetheless came with a heavy cost. The banking crisis in China resulted in a collapse (and there is no other word for it) in household consumption as a share of the economy."

At 3/08/2011 8:54 PM, Blogger juandos said...

Hey PT, I forgot about this posting on Naked Capitalism...

Thanks for reminding me since it does answer more than a few questions...

Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis


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