Is American Manufacturing on Track for a Comeback?

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LincolntonWill America ever be great again? There are signs far up the supply chain that suggest an emerging renaissance in U.S. manufacturing.

In December, Detroit's big-three automakers -- Ford (F), General Motors (GM), and Chrysler -- announced that they were going to hire 33,000 new workers. This news came on the heels of the revelation that Toyota (TM) and Subaru are now building cars in the U.S. for export to Asia.

It gets you wondering: Just what is going on here? Is this -- could it be -- the beginning of a new industrial age for America?

Yes. It very well might be.

China, and the End of Offshoring

Forgive the brain teaser, but to see why what's happening here is happening here, you have to look abroad to where it happened first: China.

If there's one country that has become the poster child for the decline of American manufacturing, it's the PRC -- and the cheap labor the country is famous for. If the 20th century was the "American Century," in which the U.S. rose to become a global economic superpower, then the first 10 years of the 21st century was definitely the "Chinese Decade."

One by one, we saw American manufacturers shutter their U.S. factories and move their jobs offshore to low-cost China. There were two big reasons: First, and most obviously, it just plain made sense to establish a manufacturing presence in China, to serve its 1.3 billion potential customers. Why make stuff here and then pay to ship goods over there when you could just make the stuff there in the first place?

Once American manufacturers got a taste of the Chinese market, they began to realize something else: Chinese labor was cheap. Cheap enough that you could build stuff over there and then import it here -- and make a hefty profit, even with shipping costs.

That was great news for Walmart (WMT) and its kin, which were able to roll back prices, bump up profits, and grab ever-larger swaths of market share in the process, all thanks to the low cost of goods made in China.

But what happens once when the cost of those goods stops being so low? I'll tell you what happens. For one thing, Toyota (TM) starts building cars in America for export to Asia. Ford, GM, and Chrysler also hire more workers to build cars here. And that's just the start:

  • Down in North Carolina, Lincolnton Furniture resumes building furniture in the U.S.
  • Element Electronics announces it's opening in Michigan the first U.S.-owned, U.S.-built television-set factory since Zenith sold out to LG Electronics.
  • Bridgestone (BRDCY.PK) invests $1.1 billion in a tire plant expansion in South Carolina.
  • Caterpillar (CAT) starts pointing to the U.S. as an example of cost-effective manufacturing, and talks about shifting production to Muncie, Ind.

Minding the Narrowing Wage Gap

Chinese wages remain cheap relative to American wages. At Apple (AAPL) supplier Foxconn, for example, some workers make as little as $17 a day. In contrast, new auto manufacturing jobs in Detroit pay $19 an hour.

But the gap is closing fast. According to the Boston Consulting Group, salaries in China are growing 15% to 20% per year. The IMF says that as recently as 1990, average per capita income in China was $350. By 2000, this figure had tripled to $1000, then hit $3,000 in 2008. Today, even a lowly Foxconn worker bee makes perhaps $5,500 a year, and experts project Chinese wages could reach First World levels of $20,000 per person by 2030.

Granted, that's nearly two decades away. But already, wage inflation is sapping the competitiveness of Chinese manufacturing.

A Slow Boat From China

Boston Consulting Group also reminds us that the average Chinese worker is only about 25% as productive as the average American worker. That wipes out a big chunk of China's price competitiveness right there.

Combine the costs of fuel and transport, the high cost of Chinese labor today, and 20% annual wage inflation, and BCG believes that by 2015, Chinese-made goods will be reduced to just a 10% price advantage over U.S.-made goods.

For now, announcements of U.S. factory openings and large job hirings are still rare enough that each one garners a newspaper headline. But already, the trend has acquired a name: "reshoring" -- as opposed to "offshoring." It's a start.

For more on restoring American competitiveness, see:

Motley Fool contributor Rich Smith does not own shares of any company mentioned above. The Motley Fool owns shares of Walmart Stores, Ford Motor, and Apple. Motley Fool newsletter services have recommended buying shares of Walmart Stores, General Motors, Ford Motor, and Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Walmart Stores, creating a synthetic long position in Ford Motor, and creating a bull call spread position in Apple.




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Mike

The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.

This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.
There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011 Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.

War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant - and very messy - transition in the global oil machine.
GOT GOLD?

January 29 2012 at 5:57 PM Report abuse rate up rate down Reply
Mike

The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount - the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.
GOT GOLD?

January 27 2012 at 5:41 PM Report abuse rate up rate down Reply
janswizz

I guess this doesn't include Solyndra does it.

January 27 2012 at 5:32 PM Report abuse rate up rate down Reply
bob

Is it because there are plenty of unemployed workers willing to work for cheap wages ?

January 27 2012 at 12:04 PM Report abuse rate up rate down Reply
1 reply to bob's comment
Mike

Thanks to Ocommy!

January 27 2012 at 1:35 PM Report abuse +2 rate up rate down Reply
Mike

Tehran Pushes to Ditch the US Dollar

India and Iran are negotiating deal to trade oil for gold. Does this matter, you ask? It strikes at both the value of the US dollar and today's high-tension standoff with Iran.

Officially the US & EU is Tehran must be punished for efforts to develop a nuclear weapon. Sanctions on Iran's oil exports meant to isolate Iran and depress the value of its currency to a point that the country crumbles.

Sanctions will not achieve their goals. Iran is far from isolated and its friends - like India - will stand by the oil-producing nation until the US backs down or acknowledges the real matter the American dollar as the global reserve currency.

In the 1970s a deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on oil trade with the US dollar as the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up. Countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. The dollar's valuation stems from its lock on the oil industry - if that monopoly fades, so too will the value of the dollar. Global fiat currency relationships will change. Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

GOT GOLD?

January 27 2012 at 10:37 AM Report abuse rate up rate down Reply
n1yearocrapleft

" " SCORPIONS FOR BREAKFAST" " THE NO. 1 BOOK IN AMERICA. ! !

January 27 2012 at 10:35 AM Report abuse +3 rate up rate down Reply
n1yearocrapleft

this incompetent muslim clown tanked our economy n housing markets n drove america into economic disaster with his record foreclosures~~record job losses~~record # of american businesses going bankrupt~~n his 16.5 unemployment rate for the last 3 years as their is now record ghettos n poverty in america n america is still in this muslim clowns great recession / depression n it will not end untill this muslim clown is removed from our white house in handcuffs ,as american jobs will keep moving overseas till this muslim clown is either impeached or removed in handcuffs. ! ! america is closed n will stay closed. ! ! Jan brewer told this muslim clown to stick his stupiless money where the sun dont shine cause america will enact our american arizona law in *all* 50 states n it will be law. ! ~muslim clown =inexperinced~unqualified~incompetent~uneducated~ignorant~~arrogant. ! !

January 27 2012 at 9:55 AM Report abuse +3 rate up rate down Reply
Jcwfuntime

You can thank President Obama for the comeback in Manufacturing and getting our country out of the recession. The country was on the brink of depression, banks were failing, unemployment was high, the auto Industry was falling apart, we were in two wars, and the stock market was down around 3,000 on the Dow. Now unemployment is lower, manufacturing is coming back, the banks are doing better, the auto Industry is doing well, making profits, and have paid thier bailout back with interest. The war in Iraque has been ended and our troops brought home, and the stock market is about to hit the 13,000 mark on the dow. All that didn't happen by accident. As far a Jan Brewer, she's basically a "loser". She tried to pass those racist laws that violated people's civil rights, and the supreme court shot them down. She's basically bankrupted the state of Arizona. They have lost millions of dollars in tourism, and people moving out of the state, and have put more tax burden on the citizens of the state. She and the state of AZ are being sued by the Federal Government, and she can't even afford to pay the legal fees. She's done the state of AZ "NO favor" whatsoever, and a poor example of a state governor. Hey, "Paybacks are tough"!!!

January 27 2012 at 9:23 AM Report abuse -4 rate up rate down Reply
1 reply to Jcwfuntime's comment
bggdg

In December 2008, the month before Obama took office, the US unemploymentrate was 7.2%. It has not been that low during a single month of the Obama Presidency, and is currently up 8.5%.

There were 25 bank failures in 2008, the year before Obama took office. In Obama's first year, 2009, there were 140 bank failures, and for an encore 157 banks failed in 2010. Bank failures decliend to 92 in 2011, but remain far above the 2008 level.

But don't let any facts get in the way of your blind obedience!.

January 27 2012 at 10:45 AM Report abuse +1 rate up rate down Reply
n1yearocrapleft

jan brewer for president after she pushed her finger in the muslim clowns face n told him to f*** off n get out of her state arizona ,cause were enacting our american arizona law in *all* 50 states n he has no say. ! !

January 27 2012 at 8:50 AM Report abuse +2 rate up rate down Reply
n1yearocrapleft

this stupid incompetent muslim clown must be removed from our white house in handcuffs now , cause america can not take another day of his stupidness n garbage n his 16.5 unemployment rate for the last 3 years ! ! ! .

January 27 2012 at 8:11 AM Report abuse +1 rate up rate down Reply