With unemployment in America still hovering near 9 percent, many Americans are upset that companies are offshoring jobs to countries such as China. However, according to a new analysis by The Boston Consulting Group (BCG), there is a “manufacturing renaissance” on the United States’ horizon.
Many companies will relocate a business process, whether manufacturing, IT services, etc., from their home country to another country – known as offshoring. Companies usually offshore business processes to take advantage of labor arbitrage, the difference in labor costs between countries, in emerging markets. This has been a popular trend over the past decade among companies in the United States as well as other developed countries with a relatively high cost of labor. However, the recent explosion of growth in emerging markets has begun to erase the gains from labor arbitrage.
From 2005 to 2010 the wages for Chinese factory workers grew 69 percent. If the wages in China continue to rise at a rate of about 17 percent per year combined with modest appreciation of the yuan against the dollar, the difference in net labor cost between China and the United States should net out around 2015, according to the study by BCG. With the United States’ economy still struggling to mount a robust comeback, workers and unions are more willing to make concessions in addition to state and local governments providing subsidies to help bring and keep jobs in the U.S. With 2015 right around the corner, some companies are beginning to consider staying home.
BCG named several companies who have already begun to move their operations back to the United States. Last year Caterpillar Inc. announced the expansion of it United States operations with the construction of a new hydraulic excavator manufacturing facility, tripling the company’s U.S.-based excavator capacity. NCR Corp. reestablished production of its ATMs to Columbus, Georgia. Wham-O Inc. returned half of its Frisbee and Hula Hoop production from China and Mexico to the United States.
However, the United States is unlikely to see a huge resurgence of factories coming from abroad. The swell in manufacturing output over last year has largely been a recovery from the financial crisis. Furthermore, some of the new factories have been attracted by government subsidies, which are unlikely to last forever given the state of municipal finances. The United States is more likely to see companies abate their plans to move plants abroad. Many multinational corporations will continue to build new factories in emerging markets, not to export back home, because demand is growing fastest in the emerging markets. Moreover, in certain industries, the United States doesn’t have the supplier base or infrastructure to support manufacturers.
As emerging markets across the globe continue to grow at breakneck speeds, the opportunity for labor arbitrage continues to evaporate. Currency appreciation in emerging markets against developed countries; inflation, without simultaneous productivity growth; and diminishing labor costs as a percentage of total cost eat away at the cost advantages from offshoring. In addition, the complex supply chains and increases in inventory held required to offshore adds to its risk and cost. Companies must really plan and see if there are true advantages to offshoring.