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'


Moving Back Home

Indeed, a number of companies, especially U.S.-based ones, are already rethinking their production locations and supply chains for goods destined to be sold in the U.S. For some, the economics have already reached a tipping point.

Caterpillar Inc., for example, 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, Texas. Once fully operational, the plant is expected to employ more than 500 people and will triple the company's U.S.-based excavator capacity. "Victoria's proximity to our supply base, access to ports and other transportation, as well as the positive business climate in Texas, made this the ideal site for this project," said Gary Stampanato, a Caterpillar vice president.

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. And 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.

Tipping the Balance

"Workers and unions are more willing to accept concessions to bring jobs back to the U.S.," noted Michael Zinser, a BCG partner who leads the firm's manufacturing work in the Americas. "Support from state and local governments can tip the balance."

Zinser noted that executives should not make the mistake of comparing the average labor costs for production workers in China and the U.S. when making investment decisions. The costs of Chinese workers are still much cheaper, on average, than comparable U.S. workers, and some managers may assume that China is a better location. But averages can be deceiving.

"If you're just comparing average wages in China against those in the United States, you're looking at the problem in the wrong way," Zinser cautioned. "Average wages don't reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today."

"In the U.S., we have highly skilled workers in many of our lower-cost states. By contrast, in the lower-cost regions in China it's actually very hard to find the skilled workers you need to run an effective plant," added Doug Hohner, another BCG partner who focuses on manufacturing.

China — Still in the Picture

Even as companies reduce their investment in China to make goods for sale in the U.S., it is clear that China will remain a large and important manufacturing location. First, investments to supply the huge domestic market in that nation will continue. Second, in the absence of trade barriers that prevent offshoring, Western Europe will continue to rely on China's relatively lower labor rates since the region lacks the flexibility in wages and benefits that the U.S. enjoys.

Third, even though other low-cost countries — such as Vietnam, Thailand and Indonesia — will benefit from companies seeking wage rates that are lower than China's, only a portion of the demand for manufacturing will shift from China. Smaller low-cost countries simply lack the supply chain, infrastructure and labor skills to absorb all of it, Hohner noted.

The BCG analysis is part of an ongoing study of the future of global manufacturing that the firm's Global Advantage and Operations practices are conducting.

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