Thursday, August 24th, 2017

Preparing for the onshoring wave from China

Posted: Thursday, November 10, 2011

Steve Dwyer is president & CEO of Conexus Indiana

Last month in this space, I wrote about how free trade has boosted Indiana manufacturing – with exports and foreign investment at record levels, Hoosiers are winners in the fiercely-contested global marketplace.

I recently read a report by the Boston Consulting Group (BCG) that gives me even more confidence in these assertions. Titled “Made in America, Again: Why Manufacturing Will Return to the U.S.,” it takes aim at a common perception among politicians and pundits here at home – that the flight of manufacturing to China has decimated our domestic industries.

We've been down this road before. Back in the 1980s, Americans watched with concern as Japanese manufacturers captured a growing share of our markets – in cars, consumer electronics and steel. Publicity-seeking congressmen went so far as to smash Japanese-made TVs and radios on the Capitol lawn. But fast forward twenty years, and Japanese investment is universally recognized as a fundamental strength of Indiana's economy. Foreign firms employ nearly 100,000 Hoosier manufacturing workers, with companies like Toyota, Honda and Subaru leading the way.

Similarly, according to the BCG report, China is a formidable competitor – but trends are already emerging that are leveling the playing field with U.S. manufacturing.

First, Chinese operations face the prospect of 15-20 percent annual wage increases at the average factory for the near future. The Chinese population is rapidly aging, creating labor shortages that drive up costs; the younger generation is also more worldly and accustomed to relative prosperity than their parents and grandparents. They are refusing to accept low earnings and grueling hours, and are winning concessions from companies desperate for workers.

Electricity prices have also skyrocketed in China (up 15 percent since 2010), and industrial land is actually more expensive than many parts of the United States. (The national average is around $10.22 per square foot, compared with just over $5 in many parts of the U.S.) Add rising transportation costs to the mix, and the Chinese cost advantage will no longer look so daunting within five years or so.

Another key issue is China's exploding domestic demand, as robust economic growth adds millions of households to its 'middle class' every year. This means that more and more of its industrial capacity will be devoted to meeting the needs of Chinese consumers, rather than producing goods for foreign markets.

All of these factors are coalescing to erode China's position as the 'default option' for global outsourcing. Countries like India, Thailand, Vietnam and Mexico will compete for the share of manufacturing exports that China loses, but lack the infrastructure (human, physical and technological) to absorb it all.

This leaves the United States with an opportunity. U.S. manufacturers would naturally prefer to have production facilities closer to home, eliminating the managerial, operational and cultural barriers that come with overseas plants. As the U.S.-China cost discrepancy narrows (hastened by the weak dollar), an 'onshoring' trend is gathering momentum – companies like GE, Boeing, Caterpillar, Ford, Master Lock and Coleman have moved operations back to domestic factories over the last two years, and more and more firms could join the trend.

We will even begin to see more Chinese companies opening plants in the U.S., as manufacturing operations here become a more cost-effective way for them to serve our market. Today, Chinese companies invest only $1 in the U.S. for every $10 that U.S. firms invest in China. But with China poised to invest a projected $2 trillion overseas in the next decade, it's clear that Chinese foreign direct investment will become an economic force in the United States, just as we've seen with Japan.

Much depends on how competitive the U.S. manufacturing sector continues to be. China's costs are rising, our costs are dropping – but it is the productivity of our workforce that provides the true advantage. Our manufacturing output is two-and-a-half times greater than it was in 1972, and even in the midst of the recent outsourcing wave (1997 to 2008), the value of U.S. manufacturing increased by a third, to $1.65 trillion.

This is due to immense investments by manufacturers in information technology and robotic systems, as well as the adoption of new practices like total quality management, lean manufacturing and six sigma. But the best equipment and most novel business strategies are useless without workers who can adapt and succeed in a complex, fast-paced environment. Human capital makes the difference.

Today, half of our manufacturing workers are older than 45, and 8,000 Baby Boomers turn 60 every day across the U.S. Workforce development is job one, training younger workers to step into open positions without compromising productivity growth.