Many people ask “why it’s better to manufacture in the USA than in China”. For many years, if not decades, everyone has held the belief that products made in the United States will be far more expensive than overseas, particularly from China. This was indeed true for many decades.
Manufacturing was cheaper outside of the US, it was easier to find the low-paid labor needed to keep factories running. In 2004, each manufacturing dollar in the United States cost only 86.5 cents to produce in China. Leaving a much wider margin for profit for goods made overseas. According to The Boston Consulting Group, by 2014, that number had changed substantially. Each manufacturing dollar in the United States costs 95.6 cents to manufacture in China. The trend suggests that the gap between those numbers can only close further. As a result, a growing number of American companies are reversing the trend and bringing manufacturing back to the US.
In the 1980s, Japan led a wave of investment into America. Then came China’s turn. In the last decade and a half, Chinese firms have spent around $46 billion in acquisitions and new establishments across America. These investments, many of which were made in only the past five years, have been across many different companies and a wide span of industries. By the end of 2014, there were almost 1,600 established Chinese firms across the United States.
This has been driven by the fact that the entire world recognizes the quality and efficiency offered by American production.
The gap between the cost of manufacturing in China and the cost of manufacturing in America has been closing rapidly. Both trends in America and trends in China have contributed to this shift. Industrial electricity costs have risen by 66% in China. Natural gas costs, on the other hand, are up 138%. In the United States, they have dropped 25%. Pay throughout China has risen at least 15% annually, which means that manufacturers must budget accordingly.
“A 5% price discrepancy in manufacturing between China and the US doesn’t amount to much,” says BCG’s David Gee. “when you consider that US manufacturers face the risks of delay when shipping from China. The threat of port strikes, and the local investments and partnerships that Beijing often requires of foreign companies doing business there.”
Contributions to the Trend
There have been many trends contributing to this shift in manufacturing. These are the primary reasons why it’s better to manufacture in the USA than in China.
- No reliance on other countries
- Price and Availability of Resources
- Leveling of Wages
- Shorter Supply Chain
No reliance on other countries
It is important to make sure that the full supply chain is within the states. Nature has blessed us with every raw material on earth, oil and gas to metal ores and rare earth metals. We shouldn’t rely on other countries to supply our goods. Let’s not forget the recent Coronavirus outbreak, as China effectively closed shop. It highlights the stability of the US nation as a whole. China is simply more susceptible to these outbreaks and has issues with transparency.
Price and Availability of Resources
You don’t need a Nobel Prize in economics to know that the fracking revolution has been good for the US. What’s not so well known is just how competitive our cheap oil and gas have made American manufacturing. BCG, the Boston consultancy, estimates the average cost to manufacture goods in the U.S. is now only 5% higher than in China. And is actually 10% to 20% lower than in major European economies. BCG projects that by 2021 it will be 2% to 3% cheaper to make stuff here than in China.
Perhaps the single largest factor is that fracking has helped dramatically drive down the price of oil and gas. Gas that’s being used in energy-intensive industries such as steel, aluminum, paper, and petrochemicals. BCG calculates that U.S. industrial electricity prices are now 30% to 50% lower than those of other major exporters.
Over the last few years, this far cheaper energy has encouraged companies to earmark $138 billion for new US-based investments. For example, the petrochemical giant Sasol (SSL) started construction on an $8.1 billion ethane cracker at Lake Charles, La. Energy companies like Cheniere (LNG) have built multi-billion LNG terminals on the Gulf of Mexico. This is exported overseas, where natural gas can be three to four times more expensive than here
Lower energy prices can also open up new opportunities such as the ability to use natural gas to power fleet vehicles and trucks. Which would further reduce American dependence on foreign oil and cut greenhouse gases. Natural gas can also be converted into hydrogen to power fuel cells like the ones in Toyota’s Mirai passenger car.
Leveling of Wages
Another major contributor to the narrowing gap of costs between the US and China is that wages have been rising in the latter. As China’s economy has developed, wages have consequently risen. Chinese manufacturing wages have risen by 187% over the last decade while manufacturing wages in the United States have increased only 27% in the same time frame. Also, the US doesn’t have to lower its prices or wages to be competitive with China; it needs only “a lower total cost to produce that product,” explains Harry Moser, founder, and president of the Chicago-based Reshoring Initiative, a nonprofit think tank that supports U.S. based manufacturing. Whilst some manufacturing industries have simply moved to lower-wage countries such as Thailand and Vietnam, the majority of high-tech and steel manufacturing is coming back to the US.
“We have before us an extraordinary opportunity, All the right factors are in place”Bob McCutcheon
Industrial products analyst for PricewaterhouseCoopers (PwC)
Shorter Supply Chain
It is now cheaper to produce some goods in the Mid-west United States than it is to produce them in China. There’s a shorter supply chain: the engineers, the manufacturers, and the customer base are all contained within the same, relatively small but very well connected geographic area. In addition, manufacturers need highly trained workers who know how to operate their automated systems and produce high-quality world-leading products.
Research and development have also shifted toward the United States. There is a great deal of innovation occurring in every sector alongside strong protection for intellectual property rights. The United States provides a strong talent pool. All of these facts are major draws for Chinese companies, which are pouring hundreds of millions of dollars into research and development in the United States each year. State and local governments also provide tax breaks and other subsidies for companies that set up shop in their jurisdiction: an incentive that many business people can’t resist.
Looking ahead to the future
So long as current trends continue, many professionals estimate that around 20-25% of the products that were previously manufactured offshore will ultimately return to the United States. This is particularly true of industries that need access to qualified labor or proximity to American consumers. Heavily automated industries, which don’t have a strong need for low-cost labor, will likely be among the first to make this shift. Industries that have a heavier reliance on cheap labor, such as clothing, however, are expected to remain offshore for the time being.
The biggest challenge of reshoring will be finding enough skilled labor. New people must be trained to fill these roles and take on the skilled manufacturing challenges, particularly in jobs that require more heavy labor than many workers are accustomed to. As training increases and more manufacturers make their homes in these areas, however, it’s likely that other businesses will quickly follow.
So, is the US about to pass China on the home stretch? Should we be thinking of giving, say, the Rust Belt a more optimistic nickname? Get in touch with us and let’s move ahead together.