CSCMP's Supply Chain Quarterly
December 12, 2018
Forward Thinking

Diminishing China-U.S. wage gap will make some states competitive for manufacturing

An analysis by the Boston Consulting Group predicts that flexible work rules, government incentives, and lower wage rates will attract production from China back to the U.S. within five years.

Within the next five years, more goods will carry the "Made in the USA" label, predicts the global management consulting firm Boston Consulting Group. According to one of the firm's senior consultants, the United States could experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become cheaper locations for production.

Harold L. Sirkin, a senior partner, noted that the price gap between U.S. and Chinese labor is rapidly narrowing with Chinese wages rising about 17 percent per year and the value of the yuan continuing to rise. "All over China, the wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor," he said in releasing some of the findings of ongoing research into the future of global manufacturing.

Meanwhile, certain states, such as Alabama, Mississippi, Texas, and South Carolina, are becoming increasingly competitive as low-cost manufacturing locations due to flexible work rules and local government incentives.

When American workers' higher productivity is factored in, wage rates in Shanghai and Tianjin are expected to be only about 30 percent cheaper than those for low-cost U.S. states. Since wages only account for 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. When inventory and shipping costs are taken into account, the total cost advantage for China will drop to single digits or be eliminated, the consulting firm predicted. Sirkin said he expects net labor costs for manufacturing in China and the United States to converge in 2015.

The Boston Consulting Group's analysts expect that manufacturing of products that require less labor and can be churned out in modest volumes, such as household appliances and construction equipment, will most likely shift back to the United States. Goods that are labor-intensive to make and are produced in high volumes, such as textiles, apparel, and televisions, will probably continue to be made overseas.

Executives who are planning a new factory in China that will manufacture exports for sale in the U.S. should take a hard look at the total costs, Sirkin said. "They're increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother—and that's before taking into account the added expense, time, and complexity of logistics," he said.

For more details on the consulting firm's analysis, go here.

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