The newsLINK Group - Made in America Makes Sense Again

Editorial Library Category: Manufacturing Topics: American Manufacturing Title: Made in America Makes Sense Again Author: newsLINK Staff Synopsis: It’s been at least ten years since U.S. businesses started sending manufacturing efforts out of the U.S. in an effort to gain a cost advantage. China was particularly attractive because it had plenty of inexpensive labor, an impressive developing market, currency that was kept artificially weaker than the U.S. dollar, and a government that offered special deals and incentives. Editorial: Made in America Makes Sense Again 4064 South Highland Drive, Millcreek, Utah 84124 │ thenewslinkgroup.com │ (v) 801.676.9722 │ (tf) 855.747.4003 │ (f) 801.742.5803 Editorial Library | © The newsLINK Group LLC 1 It’s been at least ten years since U.S. businesses started sending manufacturing efforts out of the U.S. in an effort to gain a cost advantage. China was particularly attractive because it had plenty of inexpensive labor, an impressive developing market, currency that was kept artificially weaker than the U.S. dollar, and a government that offered special deals and incentives. Times change: Chinese wages have increased, but so has U.S. productivity. The dollar is weaker internationally than it used to be, giving the advantage to exporting instead of importing. According to an August 2011 report by The Boston Consulting Group, Chinese wages are increasing from 15 to 20 percent each year. The labor-cost advantage, which was at 55 percent when the report was written, will probably be at 39 percent in 2015. Although the wage gap was $17 per hour in 2006, an economist named Dan North estimates that the gap will be $7 per hour in 2015. When the gap is small enough, then goods that are destined for a U.S. market anyway become more economical to produce here than they will be in China. Even in cases where China can still manufacture goods more cheaply than is possible in the U.S., the difference for many products will be a one-digit one. China is now focusing on increasing productivity through automation, but a focus on automation is not going to be enough to guarantee China’s continued cost advantage, and it will also reduce U.S. access to low-cost Chinese labor. Obviously, there are still times when it does make sense to export manufacturing. But it is now worth the analysis to find out whether that is, in fact, the best business move. As a result, it’s a good idea to conduct a product-by-product analysis and to consider more than just factory wages. The products that are best suited to foreign production are the ones that require a high level of labor and that are going to be sold in Asian markets anyway. It makes sense to have manufacturing centers in countries such as China if that country offers proven technological leadership or can supply economies of scale. But it also makes sense not to choose foreign manufacturing as the default option. Other countries may have ambitions to fill the gap left by China, but there may be good reasons for not just swapping out one country for another. The necessary infrastructure may be completely inadequate, and other countries may not have a sufficiently skilled workforce, either. Scale matters; so do the networks that exist to provide raw materials. You should not underestimate political and intellectual risks, low productivity, dangerous conditions for U.S. workers, and the potential for local corruption. Between January 2010 and now, approximately 520,000 new manufacturing jobs have been created. Companies like Apple, Caterpillar, DSM, Ford, GE, General Motors, and Beijing-based Lenovo have all increased their manufacturing presence in the U.S. This increase in jobs is not large at all when you compare it against the jobs that were lost in manufacturing plants between 2000 and 2009, but that isn’t the point. Right now, it is more important to notice that a shift has taken place than to measure the size of the shift. Among the experts, the consensus is that the shift can only get bigger. Some parts of the country don’t have much union dominance, a fact that encourages an increased emphasis on manufacturing, but even in the places where unions are a factor, union leaders would rather let wages drop than lose jobs altogether. There is a new competitive attitude. People recognize that if they can’t be competitive, sometimes that inability to compete translates down the road into inadequate or nonexistent jobs. From the federal government on down, the attitude today is one of encouraging job growth at home.

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