The dawn of a U.S. manufacturing renaissance

Chinese wages are rising at roughly 17% per year, the value of the yuan is continuing to increase, and the gap between U.S. and Chinese wages is narrowing rapidly. Add to that flexible work rules and a government incentives here in the states, and a new report predicts a "manufacturing renaissance" in the U.S. wherein America becomes a "low-cost country among developed nations."

The Boston Consulting Group (BCG) analysis, entitled "Made in the USA, Again: Manufacturing Is Expected to Return to America asChina's Rising Labor Costs Erase Most Savings from Offshoring" looks at a five-year window and posits that net labor costs for manufacturing in China and the U.S. will converge around 2015, driven by the yuan, up nearly 22% since it was un-tethered from the dollar in 2005, as well as wages, which are climbing from 15-20%/yr in China.

The report says that after taking into account higher productivity for American workers, wage rates in cities like Shanghai and Tianjin are expected to be about only 30% cheaper than rates in low-cost U.S. states. Further, the report says that since wages account for 20-30% of a product's total cost, manufacturing in China will be only 10-15% cheaper than in the U.S. Once inventory and shipping costs are considered, the report says the total cost advantage will drop to single digits or be erased entirely.

This will not apply for all goods, with the analysis forecasting that products that require less labor and are fabricated in modest volumes, like appliances and construction equipment, are most likely to shift to U.S. production, while labor-intensive high-volume items, like textiles, apparel, and TVs, will likely continue to be made overseas.

This should give companies pause as they consider site expansions, according to Harold Sirkin, BCG senior partner. "Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs," Sirkin said. "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."

The report cites three recent examples of this, including, of all things, plastic toys, long written off as gone to China and never coming back.

• Caterpillar Inc. : Announced a new 600,000-sq-ft hydraulic excavator manufacturing facility in Victoria, TX that will eventually employ more than 500 people and triple the company's U.S.-based excavator capacity.
• NCR Corp. : In 2009, it announced that it was bringing back production of its ATMs to Columbus, GA, in order to decrease the time to market, increase internal collaboration, and lower operating costs.
• Wham-O Inc. : In 2010, it returned 50% of its Frisbee and Hula Hoop production from China and Mexico to the U.S.