Bloomberg Businessweek
Go To Businessweek.com
During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
If I had told you in the summer of 2009 that America’s long-suffering manufacturing industries would lead the lackluster recovery from the Great Recession, you probably would have wondered what I was reading—or smoking.
I would have been correct, however. As a June 1 report from the Institute for Supply Management (ISM) noted, May 2011 marked the 22nd consecutive month in which U.S. manufacturing expanded. Exports have driven much of the growth. Last year, for example, U.S. exports increased more than 20 percent, according to the Census Bureau, and some 85 percent of those exports were manufactured goods.
It comes as no surprise that manufacturing employment also is on the rise, with related jobs increasing last year for the first time since 1997.
The good news about U.S. manufacturing is no fluke. For reasons I will explain below, the manufacturing renaissance should continue for years to come.
This does not mean it will be smooth sailing. The same ISM report that noted growth in the manufacturing sector for 22 consecutive months also showed a slowdown in the May purchasing managers index (PMI), which declined more than 10 percent from April, while its manufacturing employment index also suffered a decline. The Bureau of Labor Statistics confirmed this just a few days later, reporting a net loss of 5,000 manufacturing jobs in May, amid a modest gain of 54,000 jobs overall. Despite the May job losses, the trend line is encouraging—and clear. What’s also clear is that all U.S. manufacturers and manufacturing locations won’t benefit equally from the revival.
Although much has been made of the improving fortunes of America’s automakers, for example, U.S. manufacturing continues to shift from the highly unionized Rust Belt to the lower-cost South. This moves manufacturing’s center of gravity to such places as Chattanooga, Tenn., where Volkswagen just opened a new $1 billion factory; Madison, Miss., where the French automotive parts supplier Faurecia recently opened a 180,000-square-foot plant to supply a nearby Nissan factory; and Charlotte, N.C., where Mitsubishi Nuclear Energy Systems, which builds nuclear power plants and components, is locating a new engineering center.
While it’s important to herald America’s manufacturing renaissance, we also must remember that the U.S. has remained a manufacturing powerhouse, even as manufacturing employment took a nosedive, plummeting from a peak of 19.6 million in 1979 to 15.3 million in 2002, 14 million in 2005, and roughly 12 million today. Dramatic U.S. productivity gains enabled U.S. factories to increase output while reducing payroll. So, while China accounted for 19.8 percent of worldwide manufacturing output in 2010, the U.S. accounted for 19.4 percent.
Why the 22-month increase in manufacturing? The answer is simple: the rising cost of manufacturing in China.
Production worker wages are climbing in China at 15 percent to 20 percent a year due to a mismatch between the supply of skilled labor and the demand for it. In China’s industrial heartland—the Yangtze River Delta region, which includes the provinces of Shanghai, Jiangsu, and Zheijang—productivity-adjusted costs are rapidly converging with the costs in America’s lowest-overhead states.
Looking ahead four or five years, after adjusting for the significant productivity advantage of U.S. workers—who, in many cases, produce three times the output of their Chinese counterparts—total labor expenses in Chinese cities such as Shanghai and Tianjin will be just 30 percent lower than in the lowest-cost U.S. states.
Since wage rates account for 20 percent to 30 percent of a product’s total cost, this will make manufacturing in China just 10 percent to 15 percent cheaper than manufacturing in the U.S. With the value of the yuan continuing to increase, the total cost advantage will drop to single digits after businesses factor in inventory and shipping costs—with productivity-adjusted labor costs effectively converging by 2015 or so.
