May 2011 | Commentary | Checking In

Who Says You Can Never Go Home?

Tags: China, Manufacturing

Keith Biondo is the publisher of Inbound Logistics magazine.

Are we headed for a resurgence in U.S.-based manufacturing? Could be, according to a recent Boston Consulting Group (BCG) report that finds the United States, in some instances, holds a productivity advantage over China. If this trend is real, can business logistics practitioners help guide us to greater economic recovery by supporting growth in domestic manufacturing?

“Executives planning a new factory in China to make exports for sale in the United States should take a hard look at the total costs,” suggests Harold Sirkin, senior partner at BCG. “They’re increasingly likely to get a good wage deal and substantial incentives in the United States, so the cost advantage of China might not be large enough to bother— and that’s before taking into account the added expense, time, and complexity of logistics.

“We expect net labor costs for manufacturing in China and the United States to converge by around 2015,” Sirkin adds. “As a result, you will see a lot more products ‘Made in the USA’ in the next five years.”

After making adjustments for American workers’ relatively higher productivity, wages in Chinese cities such as Shanghai are approximately 30 percent cheaper than rates in low-cost U.S. states. And, because wages are 20 to 30 percent of a product’s cost, manufacturing in China for U.S. consumption is only 10 to 15 percent cheaper than in the United States— even before considering inventory and shipping costs. After considering those costs, the total cost advantage will drop to single digits or be erased entirely, Sirkin says.

One major concern of bringing manufacturing back to the United States, however, involves the government’s anti-business and anti-blue-and-gray-collar worker stance manifested in many ways— predatory tax policy to fund the growing dependency class (whether voluntary or not); anti-energy policy; increasing regulation; growing government control of free-market business decisions; and divisive and simplistic class-warfare rhetoric to maintain political power.

At the risk of being classified as “tax breaks for the wealthy,” state, local, and federal tax incentives for manufacturing should expand to nurture this nascent manufacturing trend. Tax policy tuned to help domestic manufacturing will offer young and non-white-collar workers choices beyond fast food or dependency. The Chinese government knows supporting manufacturing is really supporting labor. Yet some policy-makers here still man the proletarian barricades of an ideology that is on the ash heap of history. Government should step aside or help.

Logistics practitioners can help as well. The wealth of cross-enterprise experience and data you’ve accumulated through managing recent challenges— extended supply points far from your U.S. customer base; offshoring of manufactured components; increasing fuel costs; security compliance costs; rising offshore labor costs; labor unrest; and inflation— can help senior management decide between locating manufacturing here or there.