NEW YORK (Reuters) - The “Made in the USA” label may be poised for a comeback, a new study argues.
The next few years will bring a wave of reinvestment by U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make China a less attractive production center, the paper by the Boston Consulting Group (BCG) predicts.
The study, published on Thursday, says U.S. reinvestment will accelerate as the United States becomes one of the cheapest locations for manufacturing in the developed world. If it came to fruition, such reinvestment could speed up a delicate economic recovery that has yet to gain much traction.
There is evidence the trend has already started:
* Caterpillar Inc (CAT.N) has repatriated manufacturing of construction excavators, boosting investment in facilities in Texas, Arkansas and Illinois.
* NCR Corp (NCR.N) brought back production of automatic teller machines to Georgia, creating 870 jobs.
* Toymaker Wham-O moved production of Frisbees and Hula-Hoops from China and Mexico to the United States.
More such announcements are likely over the next year or two, BCG says, citing conversations with clients.
“If you work the math out using today’s numbers. you’d still say it’s a good idea to go to China,” said Hal Sirkin, a senior BCG partner and lead author of the study. “(But) around 2015, you get to a point of indifference between producing in the U.S. and producing in China.”
Wages in China are still a fraction of what U.S. workers earn. Direct pay and benefits for production workers in the United States are about $22 per hour, versus only about $2 in China, roughly 9 percent of the U.S. cost.
But that difference is expected to narrow, with the Chinese worker earning about 17 percent as much as his or her U.S. counterpart four years from now. Factoring in higher U.S. productivity rates, the weaker U.S. dollar and other factors, such as shipping costs, that difference could narrow further.
The study predicts China will remain a major global player — just less of an exporter to the United States.
China will still export to Europe, whose workers are less able to move for jobs than U.S. workers are. U.S. wage advantages could eventually reach the point that European automakers will export U.S.-made cars to Europe, the study said.
The appeal of a shorter supply chain and fewer headaches from issues like intellectual property will also help encourage jobs and production to come back to the United States, BCG said. Policy could also nudge manufacturers to make the move. High unemployment is driving state incentives to attract factories, while unions are becoming more flexible.
Still, the study’s thesis is based on assumptions that may not play out.
One is that supply and demand of labor in China are increasingly moving out of balance. Another is that demand from a growing Chinese middle class will raise costs, as factories shift to producing for domestic consumption and workers demand more pay to pay for goods that were out of reach before.
Also, the yuan’s rally could reverse. Since China first loosened restrictions on trading the yuan, its value has steadily strengthened from more than 8 yuan to the U.S. dollar in 2005 to fewer than 6.5 per dollar now.
The expected U.S. reinvestment, meanwhile, will affect some industries more than others.
Shoes or clothing are work-intensive and do not require highly skilled labor. But higher-value goods made in lower volumes, such as home appliances and construction equipment, are more likely to bear the “Made in the USA” label in coming years — especially if they are large and expensive to ship.
General Electric Co’s (GE.N) example supports the study’s contentions. GE’s appliance unit is in the middle of a four-year, $600 million plan to build up its manufacturing presence in Louisville, Kentucky, adding some 830 new jobs.
“The default has been to say: ‘Let’s put the next plant in China,’” Sirkin said. “We’re saying: ‘Sit back and think through your options.’”
BCG is a management consulting firm that advises large manufacturers on issues ranging from strategy to operations.
Additional reporting by Scott Malone in Boston, editing by Gerald E. McCormick