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The U.S. Manufacturing Renaissance: Which Industries?

by Harold L. Sirkin, Michael Zinser, Doug Hohner, and Justin Rose OCTOBER 07, 2011

Seven tipping point sectors are poised to return to the U.S. for manufacturing: transportation goods, computers and electronics, fabricated metal products, machinery, plastics and rubber, appliances and electrical equipment, and furniture. Combined with increased U.S. exports, these industry groups could boost annual output in the economy by $100 billion, create 2 to 3 million jobs, and lower the U.S. non-oil merchandise trade deficit by up to 35 percent beginning in the next five years. These are the key findings from our latest research on the shifting economics of worldwide manufacturing. They build on our analysis released earlier this year predicting a U.S. manufacturing renaissance (https://www.bcgperspectives.com/content/articles/manufacturing_supply_chain_management_made_in_america_again/). In the next five years or so, we project that China will lose most of the huge cost advantage over the U.S. that it has enjoyed since it joined the World Trade Organization (WTO) in 2001. As a result, many companies will rethink where they produce certain goods meant for sale in North America. And in the wake of our latest research, we can be more specific about which industry clusters are most likely to return and why. The seven tipping-point industry groups account for about $2 trillion in U.S. consumption each yearand roughly 70 percent of the $300 billion in goods that the U.S. imports from China. We estimate that the manufacture of as much as 30 percent of the imports from China in these sectors could return to the U.S., with a smaller share going to Mexico. U.S. exports in these industry categories should grow as well, especially to Europe and Canada, owing to the weakening dollar and higher U.S. worker productivity. As a result, we expect that the growth of U.S. manufacturing in these sectors could start to accelerate over the next five years and ultimately add about $100 billion in annual output to the U.S. economy. The job gains, equating to a drop of up to 2 percentage points in the U.S. unemployment rate compared with todays figures to around 7 percentwould come directly through added factory work as well as indirectly through support services, such as construction, transportation, retail, and housing. But why these industries? After all, they were among the early beneficiaries of Chinas entry to the WTO. In the first three years after 2001, Chinese exports to the U.S. of products in these sectors surged by about 20 percent annually. One reason is labor costs, in combination with the strengthening yuan and continued growth in U.S. productivity. Although labor accounts for a relatively low share of total costs in these industries, the fast-narrowing differential between Chinese and U.S. wages makes this an important factor. Chinese wages are projected to continue rising by 15 to 20 percent per year in U.S. dollar terms, outpacing productivity growth in China. When U.S. worker productivity is factored in, the once-enormous gap in labor costs between Chinas coastal export zones and select lower-cost U.S. states is projected to close to less than 40 percent by 2015. When shipping costs and other factors such as the hidden costs and headaches associated with extended global supply chains are accounted for, Chinas cost advantage will be marginal. Ford, NCR, Coleman, and All-Clad Metalcrafters, a high-end cookware maker, are among the manufacturers that have already transferred some production from China to the U.S. In doing so, they have sometimes cited reasons other than wages in particular, the ability to serve North American customers more quickly, reduce the risk of delivery delays, and speed the development of new products. AmFor Electronics, for instance, cited delivery responsiveness and ease of design revisions as reasons for shifting wire harness production and some final assembly from China and Mexico to Portland, Oregon. The message that emerges from our analysis is this: companies, especially those in the tipping-point sectors, should start factoring the new math of manufacturing into their global sourcing strategies. Those that continue to treat China as the low-cost default option for supplying the U.S. market could soon be at a competitive disadvantage. The era when China had a seemingly unlimited supply of workers earning less than $1 a day is over. What is required is a holistic understanding of the total costs of making any particular productand the economic trends that will influence those costs in the future. In many cases, companies will find that manufacturing in China and other offshore locations will still make sense, either because labor accounts for a high portion of total costs, shipping isnt a critical concern, or there are clear advantages to
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locating mass production within a major regional cluster in Asia. For example, companies in industries such as apparel, footwear, and textiles will remain largely offshore because China and other low-wage nations continue to enjoy big cost advantages. And even if companies move more of their manufacturing back to the U.S., that doesn't mean they will pull their manufacturing out of China. Instead, the output from their Chinese factories will be sold in Chinas fast-growing domestic market and elsewhere in Asia. But the future winners are building flexibility into their supply chains now. Some are already repatriating existing manufacturing to the U.S.and, when planning to add new production capacity to meet demand in North America, they are taking a hard, fresh look at the U.S.

Copyright 2012 The Boston Consulting Group, Inc.

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