March 8, 2013 / 4:40 PM / 7 years ago

COLUMN-U.S.-China manufacturing cost gap is closing

By John Wasik

CHICAGO, March 8 (Reuters) - A long-term U.S. manufacturing rebound is under way, and it will likely endure because the United States is becoming more competitive with China and other emerging economies.

According to a recent report by the Boston Consulting Group titled “Made in America, Again,” the cost advantage China has over the United States is shrinking fast. “Within five years, rising Chinese wages, higher U.S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U.S. and China for many goods consumed in North America,” the report said.

That means jobs that were once outsourced to the People’s Republic and elsewhere may be coming back to America. Coleman Co, for instance, is bringing manufacturing of its plastic coolers back to Wichita, Kansas, from China. Ford Motor Co is repatriating some 2,000 jobs. Increased productivity through automation combined with competitive wages is moving many U.S. companies to “in-source” production. Here are some other key factors in this trend:


The largest factor shifting industrial jobs to the United States is a shrinking disparity of labor costs. According to a study by global business adviser Ernst & Young, reported last September, average labor costs in China roughly quadrupled between 2001 and 2012. The U.S., in contrast, has seen stagnant or declining real wage growth in that period.

Factoring in all of the costs of production, Boston Group sees low-cost states such as Alabama, South Carolina and Tennessee faring well. And that’s just on the labor-cost differential.

If you’re looking for investing opportunities that would capture U.S. manufacturing overall, you might consider the Industrial Select Sector SDPR, which gained 8 percent year to date through Feb. 27.


Fueling part of the growing U.S. advantage are abundant resources and the falling price of energy in North America. The U.S. has 5.3 times more arable land than China and it has 4.6 times the water resources that China has, notes Goldman Sachs Group Inc in its 2013 outlook. That will support a rebounding industrial base.

Thanks to huge new discoveries of shale oil and natural gas, the U.S. is on course to be the world’s largest energy producer by 2020, forecasts the International Energy Agency. That bounty will lower costs for nearly every manufactured and transported product, and offset the edge from cheap labor that China has held for years.

The price of natural gas - about half of what it was five years ago - will lower costs for energy-intensive industries like chemicals, plastics and steel. Companies that sought to relocate to China and other developing countries are ramping up their investments in U.S. plants. Stocks that should benefit from this include Dow Chemical Co, United States Steel Corp and DuPont. And the plastics industry is again one of the fastest-growing U.S. manufacturing sectors, owing in part to lower energy costs.

In contrast, the cost of energy is rising substantially in China and the country generates most of its electricity by burning coal, which is causing a major environmental problems, including significant air pollution in big cities.


Another catalyst is technology. As computers become more integrated with machine tools, manufacturing costs are dropping. Advances in 3D printing are seeding a revolution in molding everything from aircraft parts to prosthetics.

The sector is expected to grow to a $6 billion industry by 2019, according to Wohlers Associates, led by companies such as Rock Hill, South Carolina-based 3D Systems Corp. Other big players are Stratsys Ltd and ExOne, which just went public last week. Since 3D printing is a nascent technology, however, it’s too soon to say if it will revolutionize manufacturing to a large degree, but it holds the promise of lower production costs.


A global consolidation in manufacturing also favors U.S. manufacturers over the long term, according to Boston Consulting. China has a diminishing advantage when long-term supply chain, transportation and real estate costs are factored in.

In the short term, though, China should not be counted out. It will be years before U.S.-based manufacturing overtakes China as the world’s busiest workshop - if it happens at all. Chinese manufacturers will still have the upper hand in labor-intensive industries such as textiles, even though they have yet to fully explore automating their factories. China’s manufacturing growth has slowed recently, but Chinese plants will be humming again if global economic activity heats up this year.

Yet if the U.S. continues down the road of lower production costs fueled by cheaper energy prices and smaller labor-cost differentials, this is a trend worth investing in - provided you can find the most productive players.

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