'Made in China' Is Starting to Get Too Expensive

American factory workerBy Brian Stoffel

American workers are far, far more productive than their Chinese counterparts.

Seem like an overly bold statement to make? Consider a recent study published by the Boston Consulting Group entitled Made in America, Again. The study makes just that assertion. And what happens when you combine lower productivity with the rising wages that Chinese laborers now demand? We might be looking at the perfect recipe for the rebirth of American manufacturing.

Digging Into Productivity Numbers

In 2010, a Chinese worker could produce just 27% of what his/her American counterpart could for every hour worked. Not because Chinese workers are lazier, nor because American workers are a dialed-in group of high-efficiency automatons. No, American workers hold the advantage largely because of our head start on automation -- we've got better machines.

It makes sense: If one group of people is producing books using the printing press while the other has ink-jet printers at their disposal, no amount of blood, sweat, and tears can make up the technological difference.

Rising wages in China further erode the advantages of setting up shop there. Take a look at what's happening with wages:


Source: Boston Consulting Group.


At first blush, it seems odd that anyone would pay a worker 70% less money (in 2000) to do a job only 10% as efficiently. If someone is only doing the job 10% as well, shouldn't he only be getting 10% of the pay?

The answer is simply that labor doesn't account for all of the costs of making a product. As the report's authors note, "Labor content ranges from only about 7 percent for products like video cameras to about 25 percent for a machined auto part." Therefore, since 2000, the tradeoffs for Chinese labor have been economically beneficial for global companies.

But while Chinese laborers are making steady gains in productivity, so too are their wages. BCG offers a succinct view: "Although we forecast that Chinese productivity growth will remain impressive ... output per worker will increase at only half the pace of the rise in wages." In other words, multinational corporations are going to be getting weaker and weaker returns on their investments in Chinese labor.

Of course, these global companies could just try moving farther inland within China, or to other Asian outposts, where the labor is cheaper. But the fact of the matter is that skilled labor is far scarcer in such areas, and the infrastructure makes the transportation of goods far more costly than from the coastal Chinese cities.

All of this leads to an obvious question: If Chinese laborers will work for less, but they can't get as much done because they don't have the same machines helping them, why not just buy those machines for Chinese workers?

The answer is actually pretty simple: By paying for the Chinese workplace to be equally automated, almost all of the cost advantages associated with setting up shop in China would disappear.

New Balance


What This Means for Chinese and American manufacturing

These shifting variables shouldn't cause Chinese workers to fear the chopping block. China has a middle class growing by leaps and bounds, and their factories will likely stay put. But instead of sending products back to the U.S., they will stay in China -- where more and more consumers are now able to afford higher-end goods.

Because of this, American products will likely be... made in America. Specifically, BCG names South Carolina, Tennessee, and Alabama as primary beneficiaries. That's good news, too, because the unemployment rate in these states puts them each in the bottom 40% of the country.

When the two factors at play are combined -- rising Chinese labor costs and the wide gap in productivity between Chinese and American workers -- an odd twist of fate emerges. The very act of globalization could bring about what many unions and environmentalists want: products sourced, made, and purchased within one's broader community.

Only time will tell if or when these predictions will play out. But judging by the hard times many have experienced due to overseas outsourcing, signs of a recovery in American manufacturing provide a sorely needed beacon of hope.

You can follow Motley Fool analyst Brian Stoffel on Twitter at @TMFStoffel.


Increase your money and finance knowledge from home

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

Add a Comment

*0 / 3000 Character Maximum

294 Comments

Filter by:
syhersch

I assume this article is a joke. Chinese workers whose average hourly wage is somewhere around 70 cents are now demanding an increase to 85 cents. I am sure that every American worker is relieved to know that their job is less threatened. STEP UP TO THE BAR WE NEED ANOTHER DRINK. Is Intel building their 3 billion dollar chip plant in China because Americans are far more productive? YOU BETTER PUT ANOTHER SHOT IN THAT GLASS.

February 09 2012 at 1:41 PM Report abuse rate up rate down Reply
Mike

Well its good to be in Colorado where the real conservatives are! Looks like we know a libtard when we see one. Poor lib media just couln't sell us their hand picked loser romney. Now all we need is Mr Cain for VP, Newt for Chief of staff, and R. Paul for treasury sec! Time to clean ALL the libs OUT of the fed govt!

February 08 2012 at 10:35 AM Report abuse +3 rate up rate down Reply
David

Personally, I am sick of alot of the Chinese junk that I am forced to buy because there are no other choices...like buying American . WalMart is slowly but surely choking themselves with their very own strangle hold. They just don't get it. They removed thousands of products from their shelves and have promised to bring them back. But they haven't. This is forcing shoppers to go elsewhere to get their goods. And once the people start looking elsewhere, they more than likely will not return to WalMart. I only support WalMart in the slightest manner because my son is a manager there. Once I get past that, it will be "Katie, bar the door" for my purchases.

February 08 2012 at 9:05 AM Report abuse +1 rate up rate down Reply
mike & nancy

the chi-coms has millions that have to work, 1 job equals 15 people that want it. no work no eat. we cannot compete with 200.00 usd a month labor

February 07 2012 at 8:08 PM Report abuse +1 rate up rate down Reply
rcdruryacfa

This story is a perfect illustration of the economy righting itself by always leaning toward an equilibrium. Chin up and stop whining America, and stop trying to "fix" the economy. The marketplace always corrects itself to the benefit of everyone.

February 07 2012 at 4:43 PM Report abuse rate up rate down Reply
chris1011

According to The Economist Magazine, one of the main reasons that we are in a pickle now is because we have such a low tax rate on capital gains versus earnings on real work. This has resulted in investment made in assets rather than things like manufacturing, which has resulted in several asset bubbles and subsequent crashes (housing bubble, the internet bubble, and before that the Savings and Loan fiasco). Until we value real work over financial dealings, we will not have full employment.

The tax rate on capital gains is half what it was during Reagan's term.

February 07 2012 at 2:01 PM Report abuse rate up rate down Reply
1 reply to chris1011's comment
rcdruryacfa

Better yet, eliminate the entire issue by going to a completely consumption-based tax system.

February 07 2012 at 4:54 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.

It’s been said the US goes to war to protect its oil supplies, but doesn't it really go to war to ensure the continuation of the petrodollar system?

February 07 2012 at 12:44 PM Report abuse rate up rate down Reply
Mike

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?

February 06 2012 at 5:41 PM Report abuse rate up rate down Reply
billcac

When as American are we going to put our country first even though it may cost more for the product we buy. If you want to look at it as a health issue not buying American, that's even more of an insentive. All the products including toys that come into this country with lead and mercury, all the foods that come in withh DDT and all the other disease related issues. I read that most of the Talapia Fish that is used throughout the world comes from fish farms that are located at the mouth of the Yellow River in China. Our problem in this day and age is to find things that come from the United States.

February 06 2012 at 11:34 AM Report abuse +1 rate up rate down Reply
Mike

Worried that the Federal Reserve and the U.S. dollar ARE on the brink of collapse, more than a dozen states have proposed using their own alternative currencies of silver and gold. ---NEW YORK (CNNMoney) -- Lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.

"In the likely event of hyperinflation, depression, or the breakdown of the Federal Reserve, State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year.

Unlike individual communities, which ARE allowed to create their own currency -- as long as it is easily distinguishable from U.S. dollars -- the Constitution bans states from printing their own paper money or issuing their own currency. But it ALLOWS the states to make "gold and silver Coin a Tender in Payment of Debts."

February 05 2012 at 11:26 AM Report abuse +1 rate up rate down Reply