Can the U.S. Bring Jobs Back from China?

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The same goes for lighting fixtures, household appliances, and more. An overwhelming majority of many of these products are made in China. And while some companies are shifting production to Vietnam or Indonesia, those countries don't have enough skilled workers to match Chinese quality and efficiency. If global shipping costs continue to rise, some businesses could eventually move their factories back to the U.S., but that process will take years. "In the short term, China is irreplaceable," says Xu Dongsheng, deputy secretary general of the China Household Electrical Appliances Assn.

How has China been able to keep its edge in the face of soaring costs? One factor that's widely overlooked is rising productivity. For the past decade, U.S. manufacturing productivity growth has averaged 4.8%. That's impressive for an industrialized nation, and bodes well for U.S. industry when the economy recovers. But productivity at medium and large Chinese manufacturers—the backbone of country's export boom—has averaged nearly 19% over the same period, says Bart van Ark, chief economist at the Conference Board, a business research group.

While American manufacturers have been tightening their belts, producers in China have been plowing money into bigger and more advanced facilities that are ahead of their U.S. counterparts. Douglas Bartlett, chairman of Bartlett Manufacturing, a Cary (Ill.) maker of high-end circuit boards used in defense and medical systems, doesn't see a big reversal in store. A decade ago the U.S. accounted for one-third of global circuit-board output. Today that's down to 10%, with China making 80%. Chinese boards are still 40% to 50% cheaper than the ones Bartlett makes in the U.S., in part because producers there have superior technology. "When factories went to China, so did the R&D," says Bartlett, who also heads the U.S. Business & Industry Council, a lobbying group for manufacturers. "I can't envision a scenario in which the price gap will drop significantly anytime soon."

Some analysts contend the China Price edge against the U.S. will remain for at least a decade. While the U.S. has become a "midprice" alternative to Western Europe thanks to the plunge in the dollar, says Boston Consulting Group senior partner Harold L. Sirkin, its cost structure in relation to China has changed only marginally. Sirkin points to industrial compressors, which are used to power equipment such as office air-conditioning systems. Three years ago it cost 38% less to make a 1.5-ton compressor in a factory in China than in an American plant. The big driver was Chinese wages and benefits, which were 65% below those in the U.S. Even accounting for rising labor costs in China, the strengthening yuan, and higher shipping rates, Sirkin estimates Chinese-made compressors are still about 30% cheaper. While that puts Mexico within striking distance as a rival site, "this is not enough of a change to bring this production home to America," Sirkin says, "and there is likely no factory and equipment left to come back to."

Expecting the U.S. to recapture industries that have already gone to China may not be realistic. But the new cost equation likely will influence many decisions about where to locate production in the future. America remains the world's biggest manufacturer, after all, because it's still the largest market for everything from drugs and packaged foods to high-end medical equipment. The U.S. may have as good a chance as anyone of being a strong player in nascent industries, whether next-generation wind turbines, medical devices with nano-scale sensors, or electric cars. The challenge will be to persuade reluctant venture capitalists and corporations to invest again in modern U.S. production facilities.

What would be required, for instance, for the U.S. to re-emerge as a player in batteries? It is an industry, after all, on the cusp of radical technological change that could spur development of future eco-friendly vehicles, cell phones, and home appliances. Boston-Power's Lampe-Onnerud has suggestions, but America may not be ready for them. Washington could lend up to $50 million in seed capital to promising startups, for example, and state governments could build industrial parks with low-cost facilities and services that rival those found in China. "If we got state and federal support," she says, "we would team up with others in a heartbeat and grow an industry."

With Dexter Roberts in Dongguan, Geri Smith and Adrienne Bard in Mexico City, Peter Coy and Jacob Stokes in New York, and Ian Rowley in Tokyo

Engardio is an international senior writer for BusinessWeek