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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