Watch out for the Pendulum

I moved a clothing distributor into Reno, Nev. a few years ago. One of their executives mentioned that nothing any of us wear is made in the U.S. anymore. That thought was troubling, but I didn’t doubt it. I recall being in the south and seeing all the old, long abandoned textile mills and thinking about our clothing industry as being effectively dead.    

This summer I first heard of the notion that manufacturing may be returning to the U.S. from overseas for the apparel industry. I doubted that but the concept of needing to satisfy quick turnaround for hot selling items made some sense, with Chinese orders taking a significant lead time to get into the US stores. 

But now, a consulting firm called The Boston Consulting Group makes the statement that manufacturing WILL return to the U.S., in it’s August 2011 report.  The report cites rising Chinese wages, higher U.S. productivity, a weaker dollar and other factors that will all but eliminate China’s manufacturing cost advantages. Factor in the advantage of manufacturing strategically closer to your customer base, plus the benefits of having better control over the manufacturing process and you can start to believe.         

For well over a decade now, the choice to locate manufacturing in China was an easy one; huge, low cost labor supply, rapidly growing domestic market, strong Dollar to Yuan exchange rate, big government incentives to attract foreign interest and the list goes on. But as all pendulums swing, this one may well have reached it apex as well and be returning toward center with increasing speed. The prediction is that within 5 years, the competitive pricing advantage will all but have closed. How can that be?

Well, the report says that China’s manufacturing sector are experiencing a 15-20% per year wage hike, add to that rising transportation costs (fuel costs alone)and duty costs. Now we factor in lowering of U.S. industrial lease and sales pricing of abundant real estate options, the risk of an around the world supply chain and a high unemployment rate with corresponding potential lowering of some U.S wage rates and there definitely seems to be a pattern here. Most all factors seem to be Pro US and Con China and a definite closing of the competitive gap. 

Like everything, nothing is ever clearly black and white; nor with this be. China will be increasing automation, however plentiful access to extremely low cost labor was their mainstay in competition and that is evaporating.  Won’t other low labor cost countries (Vietnam, Mexico, Indonesia) pick up the slack and snap up China’s lost trade?  Yes, to a degree, however limited infrastructure, lack od skilled labor and lack of domestic supply networks will limit this. Plus, added risks of using these locations will also dampen their effectiveness to be a global supplier.      

What about US ? With U.S. manufacturing losing out to Europe and Japan’s imports in the 1970’s and 1980’s, industry was left to handle the issues itself with no government intrusion. And it did. There were factory closings, entire businesses closing, millions of manufacturing jobs were lost and banks lost massive loans. But industry responded with new directions, new processes, new technology and workers reeducated and found new skillsets.  The US again lead worldwide in certain manufacturing sectors.

Today, we are still fighting the latest ‘off shore’ shift: Cheap labor from China. However, with these factors at play, the report suggests the cost gap between some Chinese manufactured products and the US counterpart may be only 10-15%.  Factor in the total costs and the gap becomes insignificant.  The area of the US’s south east is expected to be the beneficiaries of this resurgence in low prices manufacturing.  Even today, we are seeing significant industrial real estate activity in those areas. International based auto manufacturing is already well established and thriving there.

Firms that have pulled away from China, back into the US cite: rising Chinese manufacturing and shipping costs, better U.S. labor agreements, shorter lead times, improved, local control, and the inconvenience of booking orders 9 months in advance.

The report predicts that the trend back to US manufacturing is expected to accelerate, with firms not simply defaulting to China to save manufacturing costs; but rather looking into options at home as well.  This would certainly come as welcome news and we are hopeful the predictions hold the merit they seem to.