So which sectors are in the frontline of those returning to the U.S.?
Things like appliances, computers and electronics, transportation goods, plastics, and rubber. Which makes sense, because as wages rise, they are losing the advantage of low labor costs, which are very important to them.
You talk about these as tipping-point industries.
Yes, because we’re not there yet. We believe that sometime around 2015, these industries will start to get to the point where the difference in terms of manufacturing costs—not delivery costs but manufacturing costs—will be less than 10 percent. Then when you start adding in things like delivery and being far away from the customer, having lots of inventory on the water, intellectual property risks, and even country risks, it begins to make sense for companies to start bringing the goods back to America.
Can you quantify what the value of this transition will be to the U.S. economy?
We’ve tried to make some conservative estimates. This is a trend that is just beginning, so we are trying to be very conservative about it. But a fairly conservative estimate is that $100 billion to $120 billion worth of goods could return to the U.S.
Why aren’t all companies returning if the economics make so much sense? What’s the point of staying in China?
For some goods, the labor content is not at 25 percent but more like 50 percent, so in those cases the labor advantage remains. Some good companies will stay in China. For shoes and apparel, for example, labor content is 50 percent or 60 percent. Some manufacturers of those goods will leave China, but they won’t come to the U.S. They’ll go to places like Vietnam or Sri Lanka because the labor pools there are perfectly capable of producing the goods at pretty good quality.
Does this signal the end of China as the world’s manufacturing hub?
Absolutely not. It is clearly going to remain a major manufacturing hub for the world, if only because of its 1.3 billion people. We don’t think plants are going to close in China, which is growing at 8 percent to 12 percent a year. Even the lower estimate of 8 percent is a pretty good growth rate. So if you’re going to try to serve the Chinese market, you’re still going to have to build plants there. But a lot of companies that are planning new plants are going to look carefully at their supply chains. In 2010, the default position was to build them in China, but now a company may consider putting a plant in the U.S. instead. It can then take one of its Chinese plants that was exporting to the U.S. and repurpose it for domestic Chinese, or maybe Asian, consumption. The Chinese plants will remain important, but the one built in the U.S. is now closer to a very important customer base with a population of 300 million and the world’s largest economy.
And does pitching to the Chinese in their domestic market require a dramatic refurbishing of the local factories?
It depends what they’re producing. For many, many goods, it’s not going to require much of a change at all. But the Chinese consumer’s demands are growing very rapidly. Not that long ago, a large percentage of China was worrying about getting the number of calories necessary for survival each day. And now we’re way beyond that—certainly in most of the cities. People have gone from wanting bicycles—which was at one point a luxury good for many—to wanting motor scooters, cars, TVs. And like Americans and everyone else around the world, the Chinese would like to have a better lifestyle. So domestic demand in China will be growing, which means opportunities to repurpose the plants.
This seems like such a great good-news story for the American economy. Are there any negative implications of what you’ve discovered?
I’m not sure there are a lot of negative implications. We’d all like this to happen instantaneously, to have those jobs come back and reduce unemployment. This is something that’s going to happen over the course of this decade. It takes a while to build plants. It takes a while for people to understand that the economics have shifted. We’re seeing more of that taking place, but it will be another eight years to complete the process.
It’s a decision being made by individual companies, then, as they look at their own individual needs. Is that correct?
As was true with outsourcing, as well. Each individual company made a decision based on the economics, which were very powerful in 2001 when China entered the World Trade Organization. The economics are getting less powerful now, and sometime around 2015 or so, those economics for a lot of goods are not going to be very powerful at all—and that’ll make the change. But this is all about individual companies making decisions and not about some broad tariff or regulations that go into effect. This is the law of supply and demand as Adam Smith laid it out.
Is there anything that the U.S. government should be doing to ensure that these individual decisions become a full-time trend?
It will happen naturally. The issue is about speeding it up, right? One thing that the government could do would be to implement more aggressive tax credits for the creation of jobs, so that there are some plans in place that would provide faster write-offs. There are blanket programs that probably should be better targeted to have the maximum impact. One of the things we do need to do is make sure that we build training programs. Some people may have worked in plants before, but many will have no experience and will need training. And then I think at some point in time we need to think long-term about what we want our workforce to look like—building on the things that we’ve taught our children, such as going to college. But college doesn’t have to mean getting a white-collar job. We need to think of a system of vocational colleges, where students spend half of their four-year education in a liberal-arts program and the other half in welding or plumbing or other skills that will be important in plants. Those people will be very valuable. Right now, people coming from vocational schools are in far higher demand than people with liberal-arts degrees. And it would be nice to have a balance.
So are you saying that there’s a paucity of plant-trained employees in the U.S.?
It’s locational. In the U.S., even 30 years ago, the North was the manufacturing facility and the South was the agricultural area. And that has shifted pretty dramatically, but we still don’t necessarily have the people in the right place.
What advice are you giving to companies that are making decisions about, first of all, whether to relocate from China back to the U.S. and then where to place their plants?
This goes back to a situation that I found myself in with a set of clients in 2010, and it’s what got us thinking about all of this. I was sitting in a board meeting and was about ready to get approval to put another plant in China. I pointed out that we had 80 percent of our production in China, and now we’re going to have 83 percent. I asked, “Is that really what we want to do?” And they said yes because China was much lower cost. That triggered a discussion around whether it really was lower cost, and what did the long term look like? So they ran the math, and it turned out that in 2010, China was still lower cost. But they also ran the math for 2015, knowing that wages were rising 15 to 20 percent a year in China. They put that in the model, and they entered small deviations for the R&D shifts, and lo and behold, the number became something on the order of less than 10 percent. And they said maybe we need to rethink this—maybe having all our capacity in China isn’t the right thing.
And that’s what companies have to do. The default location for plants making any industrial goods and a lot of nonperishable consumer goods has been China. That was a great answer when labor costs were lower. But that is not going to be the right answer for a lot of companies anymore. They have to go back and do the fundamental math.
How do you advise companies about where to build plants in the U.S., or even in Mexico?
Mexico is going to play an important role in all of this. It has a pretty good labor force, but it does have some drawbacks right now. It is a difficult environment to operate in because of the drug cartels and other issues. I think Mexico would be a very big winner if it weren’t for that. But we still believe that the reshoring will be around 20 percent in Mexico and 80 percent in the U.S. When it comes to siting, it’s necessary to think about your entire supply chain, not just one piece of it, and it’s important not to think of it as an independent decision. If you’re building a supply chain, you’re building a 30-year supply chain. You will adjust it as things change. But don’t think about throwing everything into one location, because that would be too risky. If you put 100 percent or 80 percent of your manufacturing in one place, you lose a lot of flexibility. And if something changes, you can potentially put the company at risk because of that.
Are there any other key decisions that CEOs need to think about?
The key thing is to do the math, do the homework. People have it in their minds that China is the lowest-cost location, and right now that may still be true for a lot of industries. But part of the homework has to include the notion that you’re building something for 30 years. Costs are not the only issue. There are other risk factors that need to be considered. For instance, I think we undervalue the importance of being close to the customer.
Chesapeake Bay Candle is an interesting example. It’s a small company in Glen Burnie, Maryland. It was started by two former Chinese citizens who are now citizens of the United States. They started a candle company, and, of course, they put their manufacturing in China. This caused some problems with retailers who sold their candles in the U.S. because that long supply chain made it difficult for them to be responsive. So the company looked at the cost and the value of being responsive and decided it made sense to put a plant in Maryland. It is now in the process of making candles in Maryland for the U.S. and even exporting some of them back to China.
If you were to leave CEOs with a single message from what you’ve discovered so far, what would it be?
It’s very simple. Do your homework. The world’s changing. You’ve got to be ready for those changes and you’ve got to keep your supply chains balanced, which means you’re not only in one place. You need to understand where the costs are moving and you need to understand what the real costumer needs are. And then you want to design a supply chain that fits the entire network and gives you the flexibility over the next few years. We’re seeing the end of the phase of the entry of China and now we’re starting to see things just beginning to move back. This is a new equilibrium with a playing field that’s less tilted in China’s favor.
That’s great. Hal Sirkin, thanks very much indeed.
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