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December 14, 2017
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Is a U.S. manufacturing renaissance on the horizon?

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Within the next five years, more goods will be carrying the "Made in the USA" label, predicts the management consulting firm Boston Consulting Group.

Within the next five years, more goods will be carrying the "Made in the USA" label, predicts the management consulting firm Boston Consulting Group (BCG). According to one of the firm's senior consultants, the United States is likely to experience a manufacturing renaissance as the wage gap between the country and China shrinks and certain U.S. states become cheaper locations for production.

In a press release, Harold L. Sirkin, a senior partner at BCG, noted that the price gap between U.S. and Chinese labor is rapidly narrowing. That's because Chinese wages are rising by an average of 17 percent annually and the value of its currency, the yuan, continues to increase. "All over China, the wages are climbing at 15 to 20 percent a year because of the supply-anddemand imbalance for skilled labor," he said.

Meanwhile, certain U.S. states, including Alabama, Mississippi, Texas, and South Carolina, are becoming increasingly competitive as low-cost manufacturing locations due to flexible work rules and government incentives. As a result, when American workers' higher productivity is factored in, wage rates in the major urban centers of Shanghai and Tianjin are expected to be only about 30 percent cheaper than wage rates in low-cost U.S. states. And because production workers' wages only account for approximately 20 percent to 30 percent of a product's total cost, manufacturing in China will only be 10 percent to 15 percent less expensive than in the United States, according to Sirkin's research.

When inventory and shipping costs are taken into account, the total cost advantage for China will drop into the single digits or could even be eliminated, the consulting firm predicted. Sirkin said he expects net labor costs for manufacturing in China and the United States to converge sometime in 2015.

In addition, the Boston Consulting Group predicted that some types of manufacturing—for example, manufacturing of products that require less labor and can be churned out in modest volumes, such as household appliances and construction equipment—will likely shift back to the United States. However, goods that are labor-intensive to manufacture and are produced in high volumes, such as textiles, apparel, and televisions, probably will continue to be made overseas, Sirkin said.

Companies that are planning to open a new factory in China in order to manufacture goods to be sold in the United States should take a long, hard look at the total costs of that strategy, Sirkin recommended. "They're increasingly likely to get a good wage deal and substantial incentives in the United States, so the cost advantage of China might not be large enough to bother [with]— and that's before taking into account the added expense, time, and complexity of logistics," he said.

For more information about the Boston Consulting Group's analysis and forecast, go here.

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