It may still be premature to call it a trend with staying power, but the chatter surrounding “reshoring” of manufacturing brought from low-wage locales like China back to the United States is growing – and it’s a trend that could benefit states with lower labor costs.
With rapidly rising labor costs in what had been considered low-wage countries, lower real estate and construction costs in the United States, rising costs for transportation and “hidden” costs such as quality control issues, lax oversight of intellectual property and the disconnect from separating engineering and development from manufacturing have prompted some companies to look at bringing back manufacturing to domestic locations.
Weighing in on the reshoring wave is Harold Sirkin, a Chicago-based senior partner at The Boston Consulting Group, who detailed in an article on the Harvard Business Review blog forces that are helping to make it advantageous to once again manufacture in America.
“While it still makes sense to manufacture in China for the booming local market, producing goods in China for the U.S. market is no longer a no-brainer,” he says.
Sirkin notes that U.S. workers have much higher productivity rates than their Chinese counterparts. His research notes that labor costs in Shanghai and Tianjin may be around 30 percent lower than the lowest-cost U.S. states. “Since wage rates typically account for 20 percent to 30 percent of a product’s costs, this will make manufacturing in China just 10 percent to 15 percent cheaper than manufacturing in the United States,” he says.
With China’s currency increasing in value, he says, its cost advantage “will drop to single digits after factoring in inventory and shipping costs, with productivity-adjusted labor costs effectively converging by 2015 or so.”
That, he says, makes low-cost labor states in the South, such as Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas, attractive as manufacturing hubs for the U.S. market.