'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.


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