What is in this article?:
- Despite rising costs, Chinese manufacturing remains extremely attractive for many products
- There is no massive rush to repatriate jobs to the U.S.
- Many OEMs are looking for alternatives to expensive coastal areas of China
- Increasingly attractive consumer markets are developing in Asia
- Much of the outsourced manufacturing to China is done without an analysis of total costs
Keith: 'The explosive growth of the emerging market consumer in Asia has more than made up for the slightly diminished attractiveness of China as a new or incremental outsourced manufacturing destination for western OEMs.'
There was so much noise coming out of Washington in 2012 about the fiscal cliff, budget deficits, taxes and especially jobs that these topics became the primary conversation at many a holiday cocktail party. Over the past few weeks I’ve been asked about the current state of offshoring vs. onshoring at least a half a dozen times. Some of the inquisitors have come from a reasonably informed perspective, while others have attempted to cloak the issue of onshoring in some form of sociological or moral high ground related to the U.S. workers’ entitlement to jobs. While pondering the complex issues around outsourcing/offshoring this holiday season, I could not help but think of a few apropos, although completely unrelated, words from Charles Dickens.
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity......
Despite the occasional high profile example, or smoke and mirrors-laced press releases in 2012 from the likes of Dell and others, the general state of, and trajectory for, manufacturing in the U.S. today is not appreciably different than it was a year ago. Major shifts in industrial production patterns tend to follow long-term, secular economic trends, and are only influenced marginally around the edges by short-term changes and political issues. Yes, there is a bit more talk of late in the U.S. about nearshoring and onshoring of manufacturing; but the outlook for a dramatic resurgence of domestic production in 2013 driven by a massive repatriation of offshored manufacturing is something Dickens also addressed quite eloquently.
…. it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before U.S., we had nothing before U.S., we were all going direct to Heaven, we were all going direct the other way…….
Many of the people I talk to about reshoring production are quick to point out the dramatic rise in labor costs and other factor input costs in China as a giant catalyst for manufacturing repatriation. The rise in costs in China over the past decade have been considerable – especially in U.S. dollar terms as the yuan has appreciated considerably against the dollar since the summer of 2005. At a gross country level, the average wage of all employed persons in China has risen by about 260% over the past decade, while the equivalent macro number for the U.S. is about 26%. All of this talk among manufacturers about rising costs in China needs to be taken in context. The average employed person in the U.S. still makes more than eight times what the average employed person in China makes. When viewed relative to U.S. wages and the rate of change of U.S. productivity, Chinese manufacturing is still extremely attractive for many products despite the headline wage inflation.
China, like most geographically large countries, exhibits a pretty broad range of wages across regions and provinces. This pattern is not entirely dissimilar from the pattern that we see in the U.S. where wages tend to be higher on the coasts. Arguably the geographic variation in wages is significantly broader in China than the U.S., but this gap will likely close dramatically over the next decade or so. Many OEM’s and manufacturing services firms that are heavily invested in offshore manufacturing are starting to look for alternatives to the more developed and more expensive areas of China. But most of these firms are looking to either Western/Central China, or lower cost locations in Southeast Asia and not the U.S. 2012 was a year where some production returned to U.S. shores from China, but this represents jut a very tiny fraction of total offshore production. There is no massive rush to repatriate manufacturing jobs back to the U.S. and 2013 – 2015 will not look appreciably different in this respect.