Multinational manufacturers(Moving back to America)

“WHEN clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.

Labour arbitrage—taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.

“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.

The year 2015 is not far off. Factories take time to build, and can carry on cranking out widgets for years. So firms planning today for production tomorrow are increasingly looking close to home. BCG lists several examples of companies that have already brought plants and jobs back to America. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas. Sauder, an American furniture-maker, is moving production back home from low-wage countries. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia). Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.

BCG predicts a “manufacturing renaissance” in America. There are reasons to be sceptical. The surge of manufacturing output in the past year or so has largely been about recovering ground lost during the downturn. Moreover, some of the new factories in America have been wooed by subsidies that may soon dry up. But still, the new economics of labour arbitrage will make a difference.

Rather than a stampede of plants coming home, “higher wages in China may cause some firms that were going to scale back in the US to keep their options open by continuing to operate a plant in America,” says Gary Pisano of Harvard Business School. The announcement on May 10th by General Motors (GM) that it will invest $2 billion to add up to 4,000 jobs at 17 American plants supports Mr Pisano’s point. GM is probably not creating many new jobs but keeping in America jobs that it might otherwise have exported.

Even if wages in China explode, some multinationals will find it hard to bring many jobs back to America, argues Mr Pisano. In some areas, such as consumer electronics, America no longer has the necessary supplier base or infrastructure. Firms did not realise when they shifted operations to low-wage countries that some moves “would be almost irreversible”, says Mr Pisano.

Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest. And companies from other rich countries will probably continue to enjoy the opportunity for labour arbitrage for longer than American ones, says Mr Sirkin. Their labour costs are higher than America’s and will remain so unless the euro falls sharply against the yuan.

The opportunity for labour arbitrage is disappearing fastest in basic manufacturing and in China. Other sectors and countries are less affected. As Pankaj Ghemawat, the author of “World 3.0”, points out, despite rapidly rising wages in India, its software and back-office offshoring industry is likely to retain its cost advantage for the foreseeable future, not least because of its rapid productivity growth.

Nonetheless, a growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home. For many products, labour is a small and diminishing fraction of total costs. And long, complex supply chains turn out to be riskier than many firms realised. When oil prices soar, transport grows dearer. When an epidemic such as SARS hits Asia or when an earthquake hits Japan, supply chains are disrupted. “There has been a definite shortening of supply chains, especially of those that had 30 or 40 processing steps,” says Mr Ghemawat.

Firms are also trying to reduce their inventory costs. Importing from China to the United States may require a company to hold 100 days of inventory. That burden can be handily reduced if the goods are made nearer home (though that could be in Mexico rather than in America).

Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages. Increasingly, it makes sense to make things in a variety of places, including America.

The statists will take this and say: “See, the highest corporate tax rate in the world and it’s still the best place in the world for business”.

Imagine what a powerhouse we would be if the elephant of government wasn’t sitting on our backs.

Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages. Increasingly, it makes sense to make things in a variety of places, including America.

The number one reason US manufacturing has left the US is, and always has been. cheap labor. And the trend has been going on since the 1950s before the EPA and most regulations even existed. There are other factors, but whatever is next has been a distant second to cheap labor.

Maybe the trend is beginning to reverse to some extent due to rising wages in some cheap labor nations. But to pretend that cheap labor has not been the biggest factor in the loss of manufacturing jobs just indicates some have agendas other than dealing with reality.

There is a major energy company (privately held, and the owners rabidly hated by the left but will go unnamed since they are one of my clients) that will not by valves made in China. The quality of the metallurgy, casting, and welds are extremely substandard, especially when in high pressure, high sulfide service.

You can color me skeptical about this fad. I think its a media concoction to help 0bama get re-elected. The truth of the matter is that we can’t repatriate a lot of business to the USA because we no longer have the supply chains in place to support much domestic manufacturing. Its one thing to assemble some things here but it is something entirely different to reconstruct the supply chains (including the raw materials and the transportation infrastructure) for those businesses. The first time that we try to open mines, quarries, forests, oil fields and mills the environmentalists will take the businesses to court to shut them down.

No, this is part of the 0bama re-election spin...and I’m not buying it.

There is a group of posters on FR who love to attribute the export of US manufacturing jobs to the EPA, corporate tax rates, unions and all sorts of regulations. But they never mention cheap labor overseas.
The number one reason US manufacturing has left the US is, and always has been. cheap labor. And the trend has been going on since the 1950s before the EPA and most regulations even existed. There are other factors, but whatever is next has been a distant second to cheap labor.

Based on that kind of thinking and the current "trend" to repatriate business to the USA, I guess we'll have to pass a big immigration bill with amnesty and even a Dream Act. That'll provide us the cheap labor we need...now, who is running a re-election campaign based on an immigration bill?

Not true. Labor intensive industries will shift to where labor is cheapest. Manufacturing goes where it is cheaper to manufacture. Labor is only one component.

Other components include educated workforce, government provided incentives/subsidies, taxation, regulations and laws including environmental. So manufacturing jobs can come back to America provided “the cost” of manfacturing is attractive to do so.

Labor intensive jobs will never come back unless the US becomes a 3rd world economy while the rest of the world including Africa burgeons.

Labor intensive jobs will never come back unless the US becomes a 3rd world economy while the rest of the world including Africa burgeons.

Or unless more Americans begin to get a clue that the $950 billion in welfare and low wage subsidies now being paid annually to working age Americans are related to the fact that there are few jobs for lower skilled Americans.

All this money some think is being saved by manufacturing in cheap labor nations is simply being paid for by present and future taxpayers through ever increasing government subsidies to lower skilled Americans, who always have been and always will be part of our population.

Is $950 Billion Per Year in Means Tested Aid Enough

Just as we pay for that "cheap" illegal alien labor through many government benefits, we also pay for those "cheap" foreign imports by numerous subsidies to our lower skilled unemployed and those employed in low paying jobs.

The 'savings' realized by some companies are just being shifted to the taxpayer, present and future.

Or maybe just stop pretending that the use of cheap foreign labor actually saves any costs once all the unemployed and low wage workers in the US receive their government welfare and low wage subsidies.

The pretend ‘savings’ are being paid for elsewhere.

"The 'savings' realized by some companies are just being shifted to the taxpayer, present and future. "

THE BEST ANSWER. It's pay me or pay me later. The true cost to the taxpayer has to include the cost of imports plus the costs of government. Keep people working is the cheapest solution.

Keep people working is the cheapest solution.

Yep, and probably the only solution. Trade policies that guarantee that jobs will move to cheap labor nations, and then more and more generous government benefits to the unemployed and low wage workers is a formula for continued high employment and continued huge trade deficits and budget deficits.

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