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U.S. Manufacturing Nears the Tipping Point

Which Industries, Why, and How Much?
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The United States has been losing factory jobs for so long that many observers have all but written off manufacturing as a meaningful part of America’s economic future. The mass exodus of production following China’s 2001 entry into the World Trade Organization (WTO) deepened this pessimism.

But the tide is starting to turn. In The Boston Consulting Group’s first report in this series (Made in America, Again: Why Manufacturing Will Return to the U.S., BCG Focus, August 2011), we explained how rising wages and other forces are steadily eroding China’s once-overwhelming cost advantage as an export platform for North America. By around 2015, we concluded—when higher U.S. worker productivity, supply chain and logistical advantages, and other factors are taken fully into account—it may start to be more economical to manufacture many goods in the U.S. An American manufacturing renaissance could result.

But which industries will be most affected? By how much? And what will be the economic impact? To answer these questions, BCG analyzed the primary industry groups to identify those most likely to be influenced in the years ahead by changing global cost structures. We identified seven industry groups that account for $200 billion in goods imported from China for which rising costs in China will likely prompt manufacturing of goods consumed in the U.S. to return to the U.S.

The economic impact would be significant. Production of 10 to 30 percent of the goods that the U.S. now imports from China in those seven groups could shift back to the U.S. before the end of the decade, adding $20 billion to $55 billion in output annually to the domestic economy. We estimate that the relocation of manufacturing from China, combined with increased exports due to improved U.S. competitiveness compared with Western Europe and other major developed markets, will directly and indirectly create 2 million to 3 million jobs in the U.S., reduce unemployment by 1.5 to 2 percentage points, and lower the nonoil-related merchandise deficit by 25 to 35 percent. In fact, given the many changes sweeping the global economy, we believe our estimates are conservative.

The implications of the new manufacturing math for companies are likely to be profound. Companies that continue to treat China as the default low-cost option for supplying U.S. markets on the basis of wage rates alone could soon find themselves at a competitive disadvantage. Although still in the early stages, production shifts resulting from changing cost structures are already visible in recent sourcing moves by companies across a range of manufacturing industries. Other companies are exploring the possibility of locating future production capacity in the U.S. Meanwhile, manufacturers from Western Europe, Japan, South Korea, and even China could begin to establish more production facilities in the U.S. to serve domestic and European markets, a trend that we will examine further in future reports.

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