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

Last week we discussed the effects of China’s raising wage structure is having on driving manufacturing back to the United States. This week we will look at other factors that influence the cost to produce goods in China.Labor isn’t the only part of China’s changing cost equation. The cost of electricity has surged by 15 percent since 2010. Rising prices for imported thermal coal and an end to preferential rates for high-energy-consuming businesses are also pushing up utility rates for industry, which consumes 74 percent of China’s electricity.In addition, industrial land is no longer cheap in China.

Commercial prices are dramatically higher than in most of the U.S. Industrial land prices in one coastal city, Ningbo, for example, are $11.15 per square foot. (That’s $485,000 per acre!) Industrial land in Alabama, by contrast, is only a fraction of that. To secure lower real estate costs in China, companies will need to move inland, but this will lead to higher transportation costs and the loss of the benefits of being part of the industrial clusters that have grown up in the major coastal cities.

Another rising cost factor to producing goods in China for export to the U.S. is the transpacific shipping rates. The doubling of bunker-fuel prices since early 2009 is causing rates to increase. Rising oil prices, a falloff in new shipbuilding, and a projected shortage in container port capacity in 2015 are expected to boost ocean freight rates.The steady appreciation of the renminbi, the Chinese currency, against the U.S. dollar, is further increasing the price of Chinese exports to the U.S. This trend is expected to continue. 

Finally, there are many costs and headaches of relying on extended supply chains. These include inventory expenses, quality control problems, unanticipated travel needs, and the threat of supply disruptions due to port closures or natural disasters. With China there are added concerns about intellectual-property theft and trade disputes that result in punitive duties.Next week we will conclude this series with a look at alternatives to manufacturing in China.