More competitive at home

What a turnaround! A decade ago, pundits predicted that American manufacturing jobs were all heading offshore, never to return. But this trend has slowed, and may be poised for a reversal.

The Boston Consulting Group (BCG) recently issued a report studying manufacturing costs in the 25 largest exporting countries. The study concludes that U.S. manufacturers have grown more competitive throughout the last decade. Only seven of the 25 countries in the study had lower manufacturing costs than the United States did by early this year. Since 2004, U.S. manufacturers have improved their competitiveness compared with every major exporter except India, Mexico, and the Netherlands.

During the past 10 years, manufacturing costs in China went from being 14% less than in the U.S. to only 5% less. The report projects that manufacturing in the U.S. will be less expensive than in China by 2018.

Several factors have contributed to corporate decisions to reshore manufacturing to the United States. The BCG report points out that rising wages and higher energy costs have diminished China’s long-standing edge over the United States.

During the past decade, labor costs at factories in China, adjusted to reflect productivity gains, shot up 187%, compared with a 27% increase in the United States.

Chinese electricity costs rose 66% – more than double the United States’ 30% increase. The start of large-scale U.S. shale gas production in 2005 has reduced U.S. natural gas prices by 50%, helping to contain electricity bills in the United States as well as in Canada and Mexico.

Overall costs in the U.S. are 10% to 25% lower than those of the world’s ten leading goods-exporting nations, other than China.

“Many companies… still see North America and western Europe as high cost and Latin America, eastern Europe, and most of Asia – especially China – as low cost,” says Harold L. Sirkin, a BCG senior partner and a co-author of the study. “In reality, there are now high- and low-cost countries in nearly every region of the world.”

In Sweden, Switzerland, France, Italy, and Belgium, manufacturing has become 6% to 10% more expensive than in the U.S. during the past decade. The erosion has been driven by a combination of wage increases, lagging productivity growth, unfavorable currency swings, and rising energy costs. The United Kingdom is the cheapest location in western Europe for manufacturing, due to steady productivity growth. (Of course, some of that growth comes from increased output from more automation and fewer workers.)

Cost competitiveness is not the only reason to manufacture closer to home. Manufacturers and governments both are coming to recognize the economic importance of a stable manufacturing base. Congress may be lagging behind, but smart manufacturers are returning production to the United States – to shorten the supply chain, lower transportation costs, and get products to customers in the domestic market faster. It just makes good sense.

Do you have a story to share about your shop’s experience with reshoring? Please let me know at ebrothers@gie.net. – Eric