Backshoring...Reverse Globalization

Manufacturing in China is certainly cheaper than manufacturing here at home in the States. However, according to President Obama's plan, as per his Union address on January 24, 2012, with the right tax policies in place we may be able to increase the level of U.S. manufacturing over time. Is this a reality or a pie in the sky? Let's take a look at some facts and statistics before anyone contemplates this possible.

First, let's consider the U.S. versus China. In 2000, manufacturing workers in China were paid on average around 50 cents per hour and Americans receiving an average of about $16.60 per hour (1). That means labor costs in China were 3 percent of that in the U.S. (and this is even before we take into account that the Chinese currency was artificially cheaper as compared to the States).

So how did the U.S. lose such grip on the manufacturing industry? Primarily speaking we can say it happened between 2001 and 2004 whereas, even though the Chinese workers were not as skilled as workers in the States, the enticement by the Chinese companies with government subsidies and the cheap labor was sufficient enough for the U.S. companies to make the move. From 2001 to 2004 the U.S. imports from China grew at a rate of around 20 percent per year-an astonishing increase. Slowly but surely that rate started to reduce around 2005. By 2010 it had fallen down to approximately 42 percent. Let's not kid ourselves, Americans are still consuming plenty of "Made in China" products, but we're starting to get full.

What's been happening in China is that people have gotten richer and inflation started to take hold of the economy. The average Chinese worker is now projected to earn around $4.50 an hour by 2014-this is nine times more than what was being earned in 2000. To put that in perspective, if the American manufacturing worker experienced the same rate of wage growth, the hourly salary would be around $150 an hour by 2014. So the good news, if there is any, is that the wage gap is closing but not enough for U.S. companies to come back to the States.

Furthermore, there seems to be a major flaw about the labor cost in China versus the U.S. and that is that a worker in the States appears to be more productive compared to their Chinese counterparts. When you factor in the productivity, a Chinese worker is really costing approximately $15 per hour compared to approximately $25 per hour for a worker in the Southern U.S. Although this is still a big gap, when you factor in duties and shipping it starts to make sense for manufactures to do the same work at home versus abroad.

To really sweeten the deal and make U.S. companies want to come back home, it would appear that President Obama's proposed tax breaks may make the difference. Essentially, the plan would be to give U.S. companies tax breaks if they manufacture at home and take away tax breaks that give them an incentive to go abroad.

To give some real life examples (4) of the shift that has started to happen and hope that it will continue to happen in the future, Caterpillar, Inc., the world's largest maker of excavators and bulldozers, has been shifting some of its excavator production from abroad to Texas. Additionally, Caterpillar announced last year the expansion of its U.S. operations with the construction of a new 600,000 square-foot hydraulic excavator manufacturing facility in Victoria, TX. Once fully operational, the plant is expected to employ more than 500 people and will triple the company's U.S.-based excavator capacity. As another example, NCR Corp. announced in late 2009 that it was bringing back production of its ATMs to Columbus, GA in order to decrease the time to market, increase internal collaboration and lower operating costs. Lastly, toy manufacturer Wham-O Inc. last year returned 50 percent of its Frisbee production and its Hula Hoop production from China and Mexico to the U.S. Workers and unions are more willing to accept concessions to bring jobs back to the U.S.

According to the report by Accenture, a global management consulting company, some 61 percent of manufacturing executives surveyed by the consultancy said they were considering more closely matching supply location with demand location by re-shoring manufacturing and supply (5).  One should note that this manufacturing movement back to the U.S. is likely to happen in a trickle effect as opposed to waves. Products that are more labor intensive such as apparel and textiles will likely continue to be made overseas.

It's important not to lose sight of how powerful the U.S. manufacturing industry still is when compared against China and the rest of the world. Let's take a quick look at the numbers. According to United Nations data, the U.S. is still the largest manufacturing country in the world. In 2009, U.S. manufacturing output (in real terms) was nearly $2.2 trillion (6). That's about 45 percent larger than China's-which was just under $1.5 trillion. Though China of course is growing very quickly, the U.S. has also maintained its global share of manufacturing at 20 percent in 2009 compared to just over 22 percent in 1980. What's even more important is that manufacturing in the States is becoming more productive. In 2009, productivity in U.S. manufacturing increased by 7.7 percent which is more than any other country followed by the Bureau of Labor Statistics (7).