A return of manufacturing to the U.S. will accelerate as companies take into account the full costs of outsourcing to China and the strategic advantages of making products closer to consumers in North America, predicts a new report by The Boston Consulting Group (BCG).
The report, titled "Made in America, Again: Why Manufacturing Will Return to the U.S.," expands on earlier BCG research into the structural cost shifts that are likely to lead to what the firm has called a “manufacturing renaissance” in the U.S.
That analysis, released in May, forecast that, over the next five years, 15 to 20 percent annual increases in Chinese wages, a strengthening yuan, and other factors will nearly erase China’s manufacturing cost advantage versus low-cost U.S. states for goods imported into North America, when higher U.S. labor productivity is factored in.
The new report analyses those cost shifts in greater detail and explains why the U.S. will gain manufacturing even if Chinese productivity accelerates. Although Chinese productivity will continue to grow at an impressive 8.5 percent annually for the next five years, factory wages will rise twice as fast.
Even if Chinese factories install the same highly automated assembly lines used in U.S. factories, that would not be enough to preserve China’s fast-eroding manufacturing cost advantage for many products.
“Greater automation would undercut the primary advantage of outsourcing to China, which is access to cheap labor,” says Harold L. Sirkin, a BCG senior partner and lead author of the study. “Once companies carefully look at all the costs, many will find they’ll be better off making their products closer to customers in the U.S.”
Companies also are paying more attention to the strategic advantages of locating production of many goods closer to U.S. consumers—and to the downside of operating extended global supply chains.
“When you include things like transportation, duties, and currency appreciation, any gains from sourcing in China may not be worth the many risks and headaches associated with operating supply chains extending halfway around the world,” explains Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas.
Some manufacturers, of course, are relocating factory work from China to nations with lower labor costs, such as Vietnam, Indonesia, and Mexico. But these countries will not be able to absorb all the higher-end manufacturing that otherwise would go to China, because they lack adequate infrastructure, skilled workers, scale, and domestic supply networks.
“For the past few decades, China has been the opposite of a perfect storm for the manufacturing world. It offered a total package that is unlikely to be matched by any other low-cost nation,” says Sirkin, whose most recent book, GLOBALITY: Competing with Everyone from Everywhere for Everything, deals with globalisation and emerging markets.
“It is time for companies to fundamentally rethink their global sourcing strategies.”
This does not mean that China will decline as a major manufacturing power. The nation will remain the world’s fastest-growing consumer market.
“Foreign companies will want to maintain their Chinese manufacturing operations to serve the Chinese market and the rest of Asia,” notes Douglas Hohner, another BCG partner who focuses on manufacturing. “But in terms of supplying North America, China will no longer be the default option.”
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