Made in the USA, Again

Manufacturing expected to return to U.S. as China's rising labor costs erase most savings from offshoring; Boston Consulting Group sees U.S. 'Manufacturing Renaissance'


Chicago — May 11, 2011 — Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world, according to a new analysis by The Boston Consulting Group (BCG).

With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states — including Mississippi, South Carolina and Alabama — increasingly competitive as low-cost bases for supplying the U.S. market.

"All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor," said Harold L. Sirkin, a BCG senior partner. "We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you're going to see a lot more products 'Made in the USA' in the next five years."

Division of Low-cost Labor

After adjustments are made to account for American workers' relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product's total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S. — even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

Products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas.

"Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs," added Sirkin. "They're increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother — and that's before taking into account the added expense, time and complexity of logistics." Sirkin's most recent book, Globality: Competing with Everyone from Everywhere for Everything, deals with globalization and emerging markets.

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