Predictions about the demise of U.S. manufacturing tend to overlook a very crucial trend: the underlying math of global manufacturing is starting to swing in America's favor. New research by The Boston Consulting Group shows that the economic impact could be significant.
We estimate that the U.S. is poised to add around $100 billion in manufacturing output in this decade through higher exports and the return of production work from China in a range of industries that have historically experienced offshore outsourcing. This added production could create 600,000 to 1 million direct factory jobs and 2 million to 3 million total jobs, putting a significant dent in the U.S. unemployment rate and trade deficit.
These are among the findings of U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much?, the latest installment in a series of BCG articles on the shifts in global cost structures that are likely to cause companies to reassess where they manufacture products. The report identifies seven broad groups of industries—machinery, computers and electronics, appliances and electrical equipment, fabricated metals, furniture, transportation goods, and plastic and rubber products—accounting for around 70 percent of the goods that the U.S. imports from China, where this shift is likely to be most pronounced. We estimate that production of 10 to 30 percent of goods that the U.S. imports from China in these industries could return to the U.S.
There is much more to the coming American manufacturing renaissance than the rising costs in China documented in previous BCG research. The U.S. has also become a lot more competitive over the past decade. American manufacturers that survived, adapted, and rose to the challenge of low-cost imports have become more productive. The dollar has depreciated against the euro, the Chinese renminbi, and other currencies. And the U.S. workforce has become more flexible.
But perhaps most important, companies are paying more attention to the total costs of delivering a product made in China compared with one manufactured closer to its U.S. consumers. They are realizing that when labor content, productivity, logistics, and the many indirect costs, risks, and headaches of managing supply chains extending halfway around the world are fully accounted for, it often makes better economic sense to manufacture in the U.S., if that is where the company’s products are ultimately going to be sold.
These factors are especially relevant in the seven industry groups we identified, which are reaching a tipping point at which manufacture in the U.S. will become more economical. Using actual company data, BCG evaluated a car tire, a kitchen appliance, and a sofa sold in the U.S. in detail and found that in each case, China’s cost advantage over the U.S. is likely to shrink dramatically in five years.
This trend will also apply to Mexico, where the cost advantage will be even more significant. But we estimate that the majority of the production transferred from China is still likely to end up in the U.S. because of lower shipping costs, greater production capacity, a better supply base, more skilled workers, and much lower perceived security risks. We expect that half of the home appliance manufacturing returning to North America from China will go to the U.S., for example, as will 80 to 90 percent of reshored tire production.
The trend is still in the very early stages. But a number of companies large and small in a broad range of industries have already announced plans to move some production from China to the U.S. These include Ford, NCR, and cookware maker All-Clad Metalcrafters. Likewise, Neutex Advanced Energy Group is transferring production of commercial fixtures using light-emitting diodes from China to a new 200-worker plant near Houston. And veteran furniture manufacturer Bruce Cochrane, who helped U.S. companies outsource to China after his family sold its 91-year-old plant in North Carolina in the late 1990s, has bought back the family’s plant and founded a new company, Lincolnton Furniture, which is making wooden bedroom and kitchen sets using many rehired former workers.
The U.S. has also become more cost competitive compared with other industrialized economies. A big reason is that productivity growth has been higher in the U.S. than in Western Europe over the past decade, while the dollar has depreciated against the euro. Adjusted for productivity, the average U.S. worker is around 35 percent cheaper than the average Western European worker. A decade ago, the same U.S. worker was only 12 percent cheaper.
Recent corporate announcements support the reshoring trend. In January, Siemens said it would build gas and steam turbines in North Carolina that will be used in a large power plant it is building in Saudi Arabia. Toyota, Honda, and Nissan have all announced plans to expand U.S. production of vehicles to be exported to Asia, the Middle East, and Europe. Toyota said it would ship Camry sedans built in Kentucky and Sienna minivans made in Indiana to South Korea. Foreign companies are also starting to add capacity in the U.S. to serve their domestic markets.
Another trend that seems to confirm our findings on the tipping-point industries is moves by foreign companies to add capacity in the U.S. to serve the U.S. market. Electrolux recently decided to build a new plant in Memphis, Tennessee, and Bridgestone, Toyo Tires, and Continental have all announced plans to add U.S. capacity to manufacture vehicle tires.
Although the full impact of the global cost shifts probably won’t be felt for another decade, we recommend that companies start to reassess their global manufacturing footprints now—especially if they are in one of the tipping-point industries or are looking to make long-term capacity decisions. Continuing to regard China as the default option for manufacturing could soon put companies at a competitive disadvantage.
But companies must approach this paradigm shift intelligently. A decade ago, too many of them rushed to China, spellbound by cheap labor and a fixed currency; today they should avoid a mass exodus just because costs are rising. Instead, decisions over where to add new capacity should be based on a careful calculation of the total costs of making a particular product in a particular place for a particular market—as well as the trends that will influence those costs in the future—because such moves will influence a company’s competitiveness for the next 20 or 30 years. In many cases, China will remain the best option. But increasingly, this process is likely to lead many companies to take a fresh, hard look at the U.S.