#356. Have Your Heard? Reports of the Death of U.S. Manufacturing are Greatly Exaggerated – Part I

Have You Heard? Reports of the Death of U.S. Manufacturing are Greatly Exaggerated – Part I

We have written a number of times about the importance of manufacturing to the United States’ economy. In June 2011 we shared with you the preliminary results of a study by the Boston Consulting Group (BCG) that found that the United States is expected to see a resurgence in the manufacturing industry over the next five years. (Made in the USA, Again) The final report from that study is now available and we want to share some of the highlights with you over the next few weeks.

The U.S. manufacturing sector remains robust. Output is almost two and a half times its 1972 level in constant dollars, even though employment has dropped by 33 percent. Despite the recent wave of outsourcing to China, the value of U.S. manufacturing output increased by one-third, to $1.65 trillion, from 1997 to 2008 thanks to the strongest productivity growth in the industrialized world.

The study concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U.S. where factories are likely to be built. For many goods destined for the North American market, the cost gap between outsourcing in China and manufacturing in the U.S. will be minimal. Certain U.S. states, such as South Carolina, Alabama, and Tennessee, will be among the least expensive production sites in the industrialized world. China will continue to remain a low-cost supplier to Western Europe.

In fact, Boston Consulting expects up to 800,000 manufacturing jobs to return to the U.S. by mid-decade, with a multiplier effect creating 3.2 million jobs in total.

An example cited by the BCG study involved a hypothetical part for a car assembled in the U.S. In 2000, it would have made economic sense to source manufacturing to China, where wages were about 20 times lower ($15.81 vs. $0.72). Fast forward to 2015, workers will still be earning only one-quarter of their U.S. counterparts’ wages ($24.81 vs. $6.31). However, even with massive productivity improvements, output per worker at a Chinese factory will be only 42 percent that of a southern U.S. plant. Since labor represents approximately one-quarter of the total cost of making this hypothetical part, the total savings will shrink further, to less than 10 percent.

Next week we will discuss other reasons, besides labor, that will drive manufacturing production back to the U.S.