Thomas White Global Investing
U.S.
U.S. Stamp
December 21, 2012
A Postcard from the Americas
U.S.: ‘Made in the U.S.A’ Gets a Fillip

Worker in a Factory

U.S. manufacturing industry is getting a fillip. Many of the structural factors like labor costs, transportation costs, and supply chains are favoring relocation of some factories from other countries to the U.S.

For the past two decades, Americans have been all too familiar with the ‘Made in China’ tag. Picking up a Barbie doll, switching on a Dell laptop, or tying the lace of a Nike Shoe, one has come in contact in some way with a product that bears the ‘Made in China’ stamp. The phrase has simply become ubiquitous. And those few products that have not had the letters ‘Made in China’ printed on them, alternatively have had ‘Made in Vietnam’ or ‘Made in Malaysia’ and the like emblazoned on them. Over the years, products adorned with ‘Made in the U.S.A.’ have become an increasingly scarce sight in America. 

 Naturally, Americans over the years wondered “Do we make anything in this country anymore?” Sure we did, but in ever declining numbers in many industries such as textiles, furniture, electronics, and even consumer durables. In fact, the dwindling manufacturing contribution to U.S. GDP beginning in the mid-1970’s had some profound effects on lifestyle in the U.S. 

Once a passport to a middle-class life for many workers, the factory job simply disappeared as industries set up facilities in many Asian countries like China and Taiwan to outsource manual labor, where wages were a fraction of what they were in the United States.  Manufacturing jobs, which peaked to 20 million in late 70’s, have nosedived ever since. The U.S. lost nearly six million jobs in the decade through 2010 alone. For a time, American manufacturing seemed to be on the path of inevitable decline. 

But things may be looking up. Since 2010, it appears American manufacturing has produced more good news rather than bad news. The word about factory openings has dominated front pages more than those of factory closures. Some of America’s largest corporations like Apple have outlined plans to open factories in the U.S. General Electric’s marquee production facilities in Kentucky, which had gathered dust for decades, are now brimming with workers. New Hampshire’s century old paper mills that were on the verge of closure in the wake of plunging newspaper sales are flickering back to life apparently because Chinese demand for toilet paper is soaring. And encouragingly, more firms that had set up shop in China to take advantage of the country’s cheap labor are relocating to the U.S. for fear of losing their technology to piracy. 

During the recent Great Recession, while many jobs were created due to cyclical recovery, manufacturing played an important role in guiding the U.S. out of the mire, creating hundreds of thousands of jobs. And importantly, many of the structural factors like labor costs, transportation costs, and supply chains are favoring relocation of some factories from other countries back to the U.S.

For instance, the ‘labor arbitrage’ or the difference between the wages of an American and a Chinese worker is declining. According to the Boston Consulting Group (BCG), the savings that a U.S. firm will make by operating a Chinese factory rather than a U.S. factory will dwindle to single digits. That might prod firms to keep production in theU.S.itself. In fact, BCG estimates that seven U.S. industry groups, accounting for two-thirds of imports from China, are nearing a point where manufacturing goods in the U.S. will be economical in the long run. 

But some argue that China’s labor advantage is not going to evaporate quickly, especially considering the fact many of China’s coastal manufacturers are shifting their factories deep inside mainland China where wages are typically less. Nevertheless, these naysayers do not dispute that the U.S. will derive substantial advantages by bringing back factories home. In fact, PricewaterhouseCoopers, another consultancy, estimates that in the era of high oil prices and vulnerable supply chains, the move to diversify the production base, with an emphasis on integration of design and production centers, will pay rich dividends. 

The advantages of designing and manufacturing a product under the same roof cannot be overstated. For instance, if design and production are integrated, an engineer who designs a complex machine part can walk to the shop floor and have a chat with the production head to make real time adjustments. This is the precise reason why the iconic Otis Elevator brought back its factory from Mexico to South Carolina where its design centers are located. 

However, the most important factor favoring relocation of factories to the U.S. is cutting-edge technology. The U.S. is the pioneer in a number of ground-breaking manufacturing technologies like 3D printing and additive manufacturing, which the Economist magazine predicts will usher in the “Third Industrial Revolution,” eventually replacing the conventional assembly line manufacturing techniques that generate a lion’s share of manufacturing output today. 

Still, for all its advantages, the American manufacturing sector’s strength is likely to play out in the long term rather than in the short term. To be sure, many of the jobs that were lost in industries such as textiles and durables might not come back to the U.S. anytime soon. But American firms are ramping up factories in high-tech industries such as aerospace and pharmaceuticals and in high-end luxury goods and designer wear brands. Although the sheer number of jobs generated by these industries will not climb immediately, economists around the world are keenly watching the path that U.S. manufacturing will take from here. 

Nonetheless, there is one point that economists, politicians and workers agree unanimously: bringing back factories to the U.S. breaks the vicious cycle of factory closures, cushions the loss of jobs and prevents erosion of manufacturing skills. 

“Made in the U.S.A” tags will probably not outstrip those bearing other countries’ names in the near future. But increasingly, that stamp with the U.S flag may become more exclusive, representing goods that others are not capable of producing. 

 

Image Credit: Kheel Center, Cornell University on  Flickr under a Creative Commons License

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