Boston Consulting Group recently put out a report (PDF file, Adobe Acrobat required) outlining the future of manufacturing in the United States. Surprisingly, it leads me to believe we could be headed for a strong revival in this oft-downtrodden industry.
Revisiting the role of China
As the middle class in China has grown, so too have the salaries that skilled workers demand. Back in 2000, U.S.-based companies could set up factories in costal Chinese towns where they could count on paying workers just $0.50 per hour. By 2015, BCG says, the average worker will be demanding nine times the salary, at $4.50 an hour.
That may sound like a small salary, but when any company has the cost of an input increase in value by a factor of nine in the span of 15 years, things are bound to change. Over the next few years, BCG sees the average salary for a Chinese worker increasing 8.5% per year. They didn't venture beyond 2015 -- which was probably a wise choice -- but there's no telling how much Chinese salaries could be ramped up over the next decade.
And the labor situation is evolving. According to the report, Apple (Nasdaq: AAPL) supplier Foxconn International, "which employs 920,000 people in China alone, doubled wages at its immense Shenzhen campus following a string of worker suicides."
All in all, where there once was a 25% cost savings to doing business in China, today's multinationals enjoy a much smaller 16% cost savings today. And that's without taking into consideration supply chain costs, which we'll tackle next.
Energy costs
A rising tide in China raises more than just salaries for workers. Industry in China eats up 74% of all electricity consumed, and prices have grown an astounding 15% since just 2010.
Industrial real estate is no longer as cheap as it once was, either. The national average is $10.22 per square foot, but prices in coastal cities with a large industrial presence are much higher: In Shenzhen, it costs $21.00 per square foot of land. The average cost of real estate in the southern states of Alabama, North Carolina, and Tennessee -- the states BCG says could benefit the most -- ranges from just $1.30 to $7.43 per square foot.
And then, of course, there's the price of shipping products overseas to get back to the United States. With oil prices on the rise, and the average transit time coming in at about 21 days from China to the United States, there are obvious benefits to moving production back to the U.S.
Of course, multinational corporations could try to move their factories to inland China, where real estate and labor are cheaper. But the supply of skilled labor is far scarcer there, and the infrastructure is nowhere near as efficient for transporting goods as it is in coastal cities.
What this means for China, and the U.S.
But if you think this means that there'll be a drop-off in manufacturing in China, you're wrong. The Chinese middle class -- as well as that of several Asian countries -- is growing. It pays to be able to provide services to the region. The factories that are there will likely stay, but their products, instead of being sent to North America, will serve those Asian economies.
That means that products for North American consumption will likely be produced in North America. There are several real-life examples that the trend is taking hold:
- Ford (NYSE: F) is bringing 2,000 jobs back to the States after the UAW allowed for a $14-per-hour wage.
- NCR will be moving production of some of their ATMs back to Georgia, employing over 800 people by 2014.
- GlobalFoundries, which is a joint venture between Advanced Technology Investment Company and AMD (NYSE: AMD), will be building a $4.2 billion state-of-the-art plant in New York to manufacture silicon wafers.
And then, of course, there is the possibility that manufacturing will get more personalized and local as time goes on, led by 3-D printers. I've already highlighted this revolutionary technology, and its two industry leaders -- Stratasys (Nasdaq: SSYS) and 3D Systems (NYSE: DDD) -- which you can read about here.
The trend might just be a trickle now, but that's how all movements start, and this could bode well both for American companies and for our stubbornly high unemployment rate.
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