Americans may be fond of lamenting the decline of their country’s economic clout and the flood of “Made in China” goods, but they may soon have to find something else to complain about.
According to the Boston Consulting Group (BCG), the U.S. is fast becoming one of the lowest-cost countries for manufacturing in the developed world. BCG argues that average production costs in Germany, Japan, France, Italy and the U.K. will be 8 percent to 18 percent higher than those in the U.S. by 2015.
The report states that export manufacturing in the U.S. is a unsung hero of the economic recovery, noting, “Despite all the public focus on the U.S. trade deficit, little attention has been paid to the fact that the country’s exports have been growing more than seven times faster than GDP since 2005.”
BCG found that the U.S. is increasingly attractive for businesses because of lower costs for labor (adjusted for productivity), natural gas and electricity.
Manufacturing activity hit a five-month high in August as hiring picked up and new orders increased at their fastest pace since January, a Markit report showed Thursday.
However, BCG’s report argues that we are witnessing just the beginning of a major shift in global manufacturing.
“Over the past 40 years, factory jobs of all kinds have migrated from high-cost to low-cost countries,” said Harold L. Sirkin, the report’s co-author. “Now, as the economics of global manufacturing changes, the pendulum is finally starting to swing back. In the years ahead, it could be America’s turn to be on the receiving end of production shifts, as more companies use the U.S. as a low-cost export platform.”
The U.S. will capture between $70 billion and $150 billion in annual exports from other nations by 2020, with two-thirds of these export gains emanating from production shifts to the U.S. from leading European nations and Japan, BCG predicted.
Furthermore, by 2020, with more production shifting back to the U.S. from China, between 2.5 million and 5 million American factory and service jobs could be created. That would mean the unemployment rate could drop by up to three percentage points from its current rate of 7.4, the report said.
Chris Williamson, chief economist at Markit, agreed with BCG’s findings, but questioned the time frame for America’s re-emergence as a manufacturing powerhouse and the precise effect it would have on the wider economy.
“It’s difficult to gauge the extent to which the U.S. economy will benefit and over what time scale,” he said. “It is becoming increasingly evident that many companies are shifting production back to the U.S. from low-cost countries, notably China, as the advantages of having a production base in these countries fades or are re-evaluated.”
The BCG’s report references a number of foreign companies, such as Toyota, Airbus, Yamaha, Siemens and Rolls-Royce, which have already started to move more of their production to the U.S.
Williamson emphasized lead times as the U.S. advantage.
“Before, a lengthy, six-month transport time for goods to be shipped from Asia could be tolerated given the cost advantage,” Williamson said. “But as the cost advantage fades, the trade-off between cost and timeliness works in the latter’s favor. With the increasing use of 3-D printing, this trade-off will of course work even more in favor of localized production.”
Mary Anne Greczyn, a spokesman for Airbus, said that was in fact why the aircraft maker was opening a factory in Mobile, Ala.
“As you would imagine, for an airline such as JetBlue or American Airlines to have to come to Europe every time they get an aircraft delivered can be time- and resource- consuming,” she said. “When the new facility in Mobile is up and running, they will need only to travel to Alabama for their A320 Family aircraft.”
Greczyn added that Airbus was not moving, shifting or reshoring construction to America, but simply expanding its production facilities.
Williamson broadly agreed with the BCG report but warned that it would be many years before the “renaissance” of the goods-producing sector in the U.S.
Image credit: CC by Brent Blackburn