The notion of America winning back jobs from China in a big way seems as likely as In-n-Out opening a store in Hong Kong. Oh, wait. (If you didn't get to sample the offerings at the four-hour tasting this past weekend at The Glasshouse, too bad. As a burger aficionado, I can attest that they serve the finest burgers on the planet.)
That said, China's overwhelming manufacturing cost advantage over the US is shrinking fast. Within five years, a Boston Consulting Group analysis concludes, rising Chinese wages, higher US productivity, a weaker dollar, and other factors will virtually close the cost gap between US and China for many goods consumed in North America.
"The United States is poised to bring back jobs from China," said Harold Sirkin, co-author of a recently published study titled Made in America, Again: Why Manufacturing Will Return to the U.S.
The BCG report makes the case that manufacturing in some parts of the US will be just as economical as manufacturing in China with some compelling rationale.
First, China's labor-cost advantage over low-cost states in the US will fall significantly from 55 percent today to 39 percent in 2015 as wages and benefits continue to increase in China at 15 to 20 percent per year.
Second, the cost of savings of manufacturing in China will become minimal within the next five years when factoring in transportation, duties and industrial real estate.
Third, automation and other measures to improve productivity in China won't be enough to preserve the country's cost advantage. They will actually undercut the primary attraction of outsourcing to China—access to low-cost labor.
And last, given rising income levels in China, demand for goods will increase rapidly. This will likely incent multinational companies to devote more of their capacity in China to serving the domestic market, and shift some production work for the North American market back to the US.
This does not mean that China will decline as a major manufacturing power. The nation will remain the world’s fastest-growing consumer market. "Foreign companies will want to maintain their Chinese manufacturing operations to serve the Chinese market and the rest of Asia," said Douglas Hohner, BCG partner who focuses on manufacturing. "But in terms of supplying North America, China will no longer be the default option."
All said and done, many Americans may rediscover "Made in America" as a selling point.
“I think nowadays, Americans in particular don’t really expect that all that much is made in the U.S.A., so a tag, or a packaging that says made in America will certainly standout,” said Dawn Lerman, associate professor of marketing at Fordham University in New York.
Regardless, the economic forces that are fast eroding China's cost advantage as an export platform for the North American market need to sync up with America's own economic forces.
In the past decade alone, output from American factories, adjusted for inflation, has risen by a third.
Yet this success has come at a cost. US factories have replaced millions of workers with machines, according to Adam Davidson of The Atlantic.
"Even if you know the rough outline of this story, looking at the Bureau of Labor Statistics data is still shocking, said Davidson. "A historical chart of U.S. manufacturing employment shows steady growth from the end of the Depression until the early 1980s, when the number of jobs drops a little. Then things stay largely flat until about 1999. After that, the numbers simply collapse. In the 10 years ending in 2009, factories shed workers so fast that they erased almost all the gains of the previous 70 years; roughly one out of every three manufacturing jobs—about 6 million in total—disappeared. About as many people work in manufacturing now as did at the end of the Depression, even though the American population is more than twice as large today."
The BCG report notes that the reallocation of global manufacturing is in its very early phases. It will vary dramatically from industry to industry, depending on labor content, transportation costs, China's competitive strengths, and the strategic needs of individual companies.
The bottom line is that in order to make the most of factory work coming back to America, US workers will have to readjust, learn new skills and be willing to take on types of jobs that they haven't done in nearly a generation. How they make that transition will be interesting to watch.
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