Manufacturing Jobs Might Return to U.S. as China’s Labor Costs Rise
June 13, 2011
Will federal, state and local governments change public policy to take advantage of a development in China?
A recent study by a world-class consulting firm offers hope to regions in the United States beleaguered by high unemployment – the firm predicts labor issues in China mean U.S. firms will be less-inclined to offshore jobs.
As some U.S. states develop reputations as low-cost manufacturing centers and China’s wages increase, offshoring of jobs is expected to decline in five years, according to an international consulting firm. That’s the essence of a study by The Boston Consulting Group (BCG).
The firm’s report: “Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring.”
As usual, BCG offers enlightening insights.
“With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly,” said the firm’s press release. “Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.”
That’s thanks to a labor-shortage issue.
“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”
It’s a complex issue, but BCG further explained the rationale.
“After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states,” stated the press release. “And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered.”
Cost advantages in China will lessen
“Products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production,” according to BCG’s Web site. “Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas.”
Sirkin, who authored “GLOBALITY: Competing with Everyone from Everywhere for Everything,” advised U.S companies to examine all the labor costs.
“They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother—and that’s before taking into account the added expense, time, and complexity of logistics,” said Sirkin.
BCG said the reversal has started.
“Caterpillar Inc., for example, announced last year the expansion of its U.S. operations with the construction of a new 600,000-square-foot hydraulic excavator manufacturing facility in Victoria, Texas,” the press statement indicated. “Once fully operational, the plant is expected to employ more than 500 people and will triple the company’s U.S.-based excavator capacity.”
Caterpillar acknowledged why.
“Victoria’s proximity to our supply base, access to ports and other transportation, as well as the positive business climate in Texas made this the ideal site for this project,” said Gary Stampanato, a Caterpillar vice president.
Two other companies change course
“NCR Corp. announced in late 2009 that it was bringing back production of its ATMs to Columbus, Georgia, in order to decrease the time to market, increase internal collaboration, and lower operating costs,” said the consulting firm. “And toy manufacturer Wham-O Inc. last year returned 50 percent of its Frisbee production and its Hula Hoop production from China and Mexico to the U.S.”
U.S. unions, of course, have been an obstacle.
“Workers and unions are more willing to accept concessions to bring jobs back to the U.S.,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Support from state and local governments can tip the balance.”
Mr. Zinser said U.S. executives need to look a bigger wage-cost picture.
“If you’re just comparing average wages in China against those in the United States, you’re looking at the problem in the wrong way,” Zinser cautioned. “Average wages don’t reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today.”
Another factor is labor shortage.
“In the U.S., we have highly skilled workers in many of our lower-cost states. By contrast, in the lower-cost regions in China it’s actually very hard to find the skilled workers you need to run an effective plant,” added Doug Hohner, another BCG partner who focuses on manufacturing.
China will continue as a major player in manufacturing U.S. products, but Mr. Hohner offers these forecasts:
- First, investments to supply the huge domestic market in that nation will continue.
- Second, in the absence of trade barriers that prevent offshoring, Western Europe will continue to rely on China’s relatively lower labor rates since the region lacks the flexibility in wages and benefits that the U.S. enjoys.
- Third, even though other low-cost countries—such as Vietnam, Thailand, and Indonesia—will benefit from companies seeking wage rates that are lower than China’s, only a portion of the demand for manufacturing will shift from China. Smaller low-cost countries simply lack the supply chain, infrastructure, and labor skills to absorb all of it.
Public policy
My sense is the big question is whether government will start doing the right thing in public policy? Oops, that goes for unions, too, and the ostensible political motivations of the National Labor Relations Board (NLRB).
A brouhaha comes to mind – the issues over Boeing launching a manufacturing plant in South Carolina. For years, state government and union political activity gave the aerospace giant no option, but to look for a better locale-alternatives to build the 787 Dreamliner.
An editorial in a Tacoma, WA newspaper, The News Tribune, made a salient comment: “The NLRB complaint – which alleges that Boeing retaliated against its workers for striking when it choose to expand in South Carolina rather than Washington – appears to be little more than an attempt to assuage battered union interests.” (The right way to win Boeing jobs for Washington state)
In a similar editorial, NLRB complaint against Boeing needs critical look, The Seattle Times cited President Obama’s rhetoric about generating jobs.
“Really a president does not create manufacturing jobs. He creates policies that may encourage companies to create jobs — companies like Boeing, which has now had the creation of 1,000 jobs in South Carolina second-guessed by Obama’s National Labor Relations Board,” wrote the editorial writers.
“In its complaint, the NLRB is attempting to reverse a U.S. investment by the nation’s No. 1 exporter 17 months after the company decided to make it — after the money has been spent, after the equipment is set up and after 1,000 workers have been hired. In South Carolina, assembly of the first 787 is scheduled to begin this summer. For the government to demand now that the company move everything to another state shows no sense of practical reality,” the newspaper asserted.
Agreed.
Let’s hope BCG is right and the manufacturing jobs return. But more than political rhetoric, we need competence in government. If the right public policies are implemented, political and economic liberties will improve for everyone – not just the unions’ leadership.
To visit the BCG Web site: www.bcg.com
From the Coach’s Corner, here are related public-policy columns:
Job Creation: Will Public Officials Listen to Intel’s CEO?
Solutions for 3 Dangers to Small Business, Travelers’ White Paper
Common Sense for Washington State Pension Reform
“I don’t make jokes. I just watch the government and report the facts.”
-Will Rogers
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Why You Can’t Get Work or Hire Workers
Are you one of the countless baby boomers who is relying on Social Security before you reach retirement age? You’re not alone. The dearth of jobs has prompted many Americans to accept lower Social Security payments at the age of 62. This means Social Security is forecast to start paying out more in benefits than it receives starting in 2017.
The Labor Dept. says some 2.7 million Americans will lose their unemployment parachute checks near the tax-filing deadline of April15. About 6.3 million folks have been out-of-work for six months or longer.
The government believes 15 million people are jobless. That’s only an estimate. It doesn’t include the high number of self-employed people desperately taking independent contractor projects because they can’t find jobs, or the under-employed taking temporary jobs.
These numbers also jurt job creation. Higher unemployment rates charged to business by government is a disincentive, too.
After having worked through 6 major economic downturns, my analysis of the data and the trends is that the real unemployment rate is about 25 percent. That’s depression-like, not recession-like numbers.
A recent study proves it’s getting worse for American workers. The Center for Labor Market Studies at Northeastern University in Boston sums up the problem in its study’s subtitle – “A Truly Great Depression Among the Nation’s Low Income Workers Amidst Full Employment Among the Most Affluent.”
For the nation to catch up, most experts believe 100,000 new jobs need to be created every 30 days. But veteran pragmatists know it won’t happen. Count me as one of those.
The job drought is not a new phenomenon in the sense that it’s been years in the making. The federal government began tracking the number of unemployed in 1948.
Many jobs have not and will not return. Not to over-simplify, institutional investors own increasing numbers of companies. Largely, they extract profits by slashing payrolls and encouraging offshoring of jobs in Latin America and Asia where labor is cheaper.
Since 2000, automation is responsible to cutting 5.6 million jobs.
After each recession since 1970, job-growth rates have decreased. Published reports indicate that even before the Great Recession, it was less than one percent a year and was only 2.4 percent in the 1990s and 1980s, according to the Labor Department figures.
Based on trends following recessions, I’m in agreement with economists who forecast it will be at least five years before the unemployment rate returns to more palatable levels – hence, the term, jobless recovery. Even then, I’m not sure it will happen.
Historically, consumer spending has been a key ingredient for economic recovery. But that won’t happen unless there’s a fundamental economic change.
This also means the tax revenue pie for governments at all levels will remain flat.
For good reason, Americans have returned to 1930’s money values. They’re becoming tight-fisted with their money and are demanding government accountability.
The housing bubble resulted in a high volume of excise taxes, but the high rate of foreclosures alters that scenario.
Talk to anyone who checks credit for consumers or small businesses. The aggregate level of bad credit is huge –largely caused by the predatory behavior of big lenders. They’ve nearly destroyed the livelihoods of small businesses with mega interest rate hikes for bogus reasons.
Small business has historically has been the main job-creation engine, but no more.
Small businesses do not have the financial firepower expand and create jobs. New credit card legislation does nothing to correct the injustices.
Instead of focusing on helping business, government at every level, is hindering the economic climate. Economic and political freedoms are being stolen each day by bad government policy (See this site’s other Public Policy columns). The largest employer in many communities is government. Public-sector agencies are still growing, not laying off, while spending and taxing at ever-increasing levels. For the common good of all Americans, change is needed.
Businesses and consumers can no longer afford the status quo in taxes. Government must reform.
From the Coach’s Corner, effective on Feb. 22, 2010, here is the essence of the credit card law:
- Credit card companies cannot increase the rate in the first year until the introductory rate expires. The banks must give 45 days notice to change the rate.
- Unless two months past due, rates can’t be changed.
- The original interest rate must be granted once payments are on time for six months.
- The fine print will be easier to grasp.
- Activation and annual fees can’t exceed 25 percent of the credit limit in the first year; and will be unlimited after 12 months.
- Credit card statements must be sent three weeks in advance.
- Transactions can’t take place over the credit limit unless the cardholder agrees.
- The “universal fault” nonsense (if you were late one day on one payment, the other credit card companies jacked up your rate) is stopped and interest rates on existing balances must stay the same (see No.1).
- Companies can’t give students or anyone under 21 a car unless she/he has a co-signer or the autonomous ability to pay statements. Schools have to make public any credit-card marketing deals, and companies cannot stage publicity or giveaway events on or near campuses.
Need a Job? The Recession and Offshoring Don’t Have to Be Obstacles
Updated June 2, 2010
All eyes are on Germany as the possible savior in the woes of the European Union’s recovery. Germany was the first to enjoy a growing gross domestic product. But Germany is eyeing budget cuts – billions of euros. Possible cuts include defense and higher sin taxes. The goal is savings totaling €10 billion or $12.22 billion.
Economists’ eyes are also on the U.S. GDP, a basic measure of the nation’s performance. But the U.S. recession will not be officially over until we get a definitive word from the National Bureau of Economic Research. Not to be negative, but you might recall the official determination about the current recession was late – not until December 2008. That was a full year after the bureau’s economists realized the recession originated 12 months earlier.
During those 12 months, many on Main Street were already reeling from the effects of the severe downturn. Profits were harder to achieve, especially for retailers. Advertising budgets were cut. Autos and trucks weren’t selling well as consumers became more tight-fisted with their money. The situation was exacerbated when big banks and credit card companies started cutting credit lines and imposing stiff fees in undesirable usury practices.
If you’re a boss planning your budget and workforce, it is certainly best to consider more than a macro-view of the economy. For an accurate snapshot, use discernment in the micro factors directly and indirectly affecting you. Listen closely to your customers.
That also means: Don’t be fooled about many companies exceeding earnings expectations on Wall Street during the recession.
Candidly, times are not necessarily good if those companies are merely cutting employee hours or laying-off workers and slashing costs to achieve profits. Profits created by stagnant wages adversely affect consumer confidence.
If you are a non-exempt employee – just like senior management – you should be aware of these issues. Higher profits do not equate with strong employment prospects, either. So, even if the GDP gets in the black, we still might not be in a true recovery.
What else should you do? Stay positive and passionately do your best to help your company make a dollar. And if your company lobbies government in the political arena, find why. It just might be to create an environment conducive to competitiveness.
Offshoring Job Losses
Many Americans have either been under-employed or jobless as the result of offshoring jobs, too. Just as automation replaced workers a few decades ago, look for innovation and productivity to increase as companies cut costs.
A study by The Conference Board and Duke University shows the number of offshoring U.S. companies dramatically increased from 2005 to 2008 – 22 percent to 50 percent. What’s more, 60 percent of such companies plan to increase their offshoring.
Business has complained for years about too few Americans having degrees in science and math. The lack of talent and innovations in speeding products to the marketplace are the catalysts for the increase in offshoring.
No matter how you are impacted by offshoring, you will want to read the comment by the report’s co-author on The Conference Board Web site, www.conference-board.org.
“Outsourcing innovation in engineering, research and development, product and software development, and knowledge processes makes companies, whatever their country of origin, more competitive by increasing speed to market and compensating for domestic talent gaps,” wrote Ton Heijmen.
The report also states the shortage of American talent has prompted many small companies to offshore jobs. And the talent is not limited to China or India – talent is being utilized in Brazil, Egypt, Sri Lanka and Russia.
Conversely, many economists say jobs are coming to the U.S. as a result of the offshoring phenomenon.
“That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations),” wrote Richard Baldwin, a professor of International Economics at the Graduate Institute, Geneva on www.voxeu.org.
VoxEU.org is a portal established by the Centre for Economic Policy Research, www.CEPR.org.
One of the reasons for offshoring is competitiveness – due to a lack of economic and political liberty – a condition imposed by the federal and state governments. (For Northwest readers, see: Analysis: Steps for Economic Success in Washington State.)
Consider this statement on the Web site of the nonpartisan Tax Foundation:
“Currently, the average combined federal and state corporate tax rate in the U.S. is 39.3 percent, second among OECD countries to Japan’s combined rate of 39.5 percent,” wrote Scott A. Hodge, president of the Tax Foundation, www.taxfoundation.org.
(Thirty countries belong to OCED, Organisation for Economic Co-operation and Development, www.oecd.org. It was formed in 1960 for a “For a stronger, cleaner, fairer world economy.”)
Among his other conclusions, Mr. Hodge has a stunning assessment: “24 U.S. states have a combined corporate tax rate higher than top-ranked Japan.”
So here is the bottom-line: Undeniably, many Americans have suffered hardship as a result of the recession and offshoring. However, remember the U.S. will soon come out the recession and we are a vital part of an evolving dynamic global economy.
The best approach has always been the free-enterprise system. Embracing change is the only productive option for individuals to enjoy success.
The road to economic success will be easier if governments stop their heavy taxation. Instead, economic wisdom and best practices should be their goals.
Economic and political liberties are vital to the success of this nation – the effectiveness of economic policies depends on whether government has economic wisdom. That means allowing for economic and political liberties.
As I’ve written before: “Economic liberty is the freedom to make decisions in a free-enterprise system. Political liberty is possible when government stops its unproductive practices so entrepreneurs can have the necessary tools to create jobs and take full responsibility for their successes or failures.”
From the Coach’s Corner, if you are out of work or under-employed, it is time for an assessment of your strengths, weaknesses, opportunities and threats. Consider a career that offers more value to an employer or learn business-startup skills if you want to be the big boss.
For more insights on how to cope with offshoring of jobs, you might want to read the writings of Michael T. Robinson, the creator of www.careerplanner.com. I agree with his approach.
Visit: www.careerplanner.com/Career-Articles/Offshoring-Jobs.cfm.
If you decide to launch a business, don’t be surprised if you become more aware of the need for economic and political liberty.
