BCG Expects Manufacturing to Return to US as China's Labor Costs Soar

Is US manufacturing poised for a renaissance?

A new study by The Boston Consulting Group (BCG) says it is and I find the analysis quite convincing.

For starters, BCG points out that the gap between US and Chinese wages is narrowing rapidly. Thanks to the demand for skilled labor in China, Chinese wages are rising at about 17 percent per year, while the value of the yuan continues to increase.

At the same time, flexible work rules and a host of government incentives are making many statesincluding Mississippi, South Carolina, and Alabamaincreasingly competitive as low-cost bases for supplying the US market.

According to BCG, net labor costs for manufacturing in China and the US are likely to converge sometime around 2015.

Factor in the costs, risks and headaches of inventory and shipping, and the advantages of offshoring shrink even more.

The BCG analysis, which is part of an ongoing study of the future of global manufacturing, concludes that:

Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas.

Goods that are less labor-intensive and produced in modest volumes, such as household appliances and construction equipment, are most likely to shift to US production.

"Executives who are planning a new factory in China to make exports for sale in the US should take a hard look at the total costs. They're increasingly likely to get a good wage deal and substantial incentives in the US, so the cost advantage of China might not be large enough to botherand that's before taking into account the added expense, time, and complexity of logistics," Harold L. Sirkin, a BCG senior partner, said.

Even so, BCG stresses that China will remain an important manufacturing location. First, China has a massive domestic market. Second, Western Europe will continue to rely on China's relatively lower labor costs. And, lastly, other low-cost countries (Vietnam, Thailand, Indonesia) lack the supply chain, infrastructure and labor skills to absorb all the demand for manufacturing that will shift from China.

I'm not discounting China as a manufacturing force, but study results like these make me think that we are likely to see much more of the "Made in America" label over the next few years.

TAGS: Finance
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