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Nov 2

Written by: Fitzweller Administrator
11/2/2011 9:01 AM 

CHICAGO, October 7, 2011—Transportation goods such as vehicles and auto parts, electrical equipment including household appliances, and furniture are among seven sectors that could create 2 to 3 million jobs as a result of manufacturing returning to the U.S.—an emerging trend that is expected to accelerate starting in the next five years, according to new research by The Boston Consulting Group (BCG).

 The BCG analysis identifies those broad industry clusters that are most likely to reach a “tipping point” by around 2015—a point at which China’s shrinking cost advantage should prompt companies to rethink where they produce certain goods meant for sale in North America. In many cases, companies will shift production back from China or choose to locate new investments in the U.S. The U.S. is also expected to become a more competitive export base in these sectors for Europe and Canada.

 “A surprising amount of work that rushed to China over the past decade could soon start to come back—and the economic impact could be significant,” said Harold L. Sirkin, a BCG senior partner and lead author of the analysis. “We’re on record predicting a U.S. manufacturing renaissance starting by around 2015. Now we can be more specific about which industries will return and why.”

 In addition to transportation goods, electrical equipment/appliances, and furniture, the sectors most likely to return are plastics and rubber products, machinery, fabricated metal products, and computers/electronics. Together, these seven industry groups could add $100 billion in output to the U.S. economy and lower the U.S. non-oil trade deficit by 20 to 35 percent, according to BCG.

 The tipping-point sectors account for about $2 trillion in U.S. consumption per year and about 70 percent of U.S. imports from China, valued at nearly $200 billion in 2009. The job gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail.

 “This does not mean that factories in China will close,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Instead, more of their output will be consumed in the fast-growing domestic market and elsewhere in Asia.”

The research builds on an initial analysis that BCG released in May and further developed in an August report titled Made in America, Again: Why Manufacturing Will Return to the U.S. With Chinese wages rising at 15 to 20 percent per year and the value of the yuan continuing to appreciate against the dollar, the report predicted that the once-enormous labor-cost gap between Chinese coastal provinces and certain lower-cost U.S. states will shrink to less than 40 percent by around 2015.

 When higher U.S. productivity, the actual labor content of a product, shipping, and other factors are taken into account, the cost advantage of making many goods in China that are bound for sale in the U.S. will be marginal. “That will make the U.S. a much more attractive investment location for new factory capacity,” said Sirkin, whose most recent book, GLOBALITY: Competing with Everyone from Everywhere for Everything, deals with globalization and emerging markets.

 The new analysis spells out what these cost swings will mean to specific industry clusters. Sectors like apparel, footwear, and textiles will remain largely offshore because China and other low-wage nations will still enjoy large cost advantages. The biggest impact will be felt in sectors in which wages account for a relatively small portion of total production costs and in which logistics costs and other factors such as shipping time and distance are critical.

 Some production migrating from China will go to Mexico, where labor costs will remain cheaper than in either China or the U.S. But not as much as one might think. “America’s experience in these tipping-point sectors and its much larger pool of skilled workers, as well as logistical and security concerns, will make the U.S. a better option for many companies,” explained Justin Rose, a BCG principal and a coauthor of the analysis.

 The changing economics of manufacturing are already showing up in trade data. From 2001 through 2004, imports from China grew by around 20 percent per year. That growth rate has slowed dramatically, to only around 4 percent in the past few years. U.S. imports from other low-cost nations also have flattened—and actually declined in 2009. The trend is especially pronounced in the tipping-point sectors. “We are already starting to see some movement of production in these industries,” said Douglas Hohner, a BCG partner and also a coauthor of the analysis.

Recent moves by companies underscore the new manufacturing math. Ford, NCR, Master Lock, high-end cookware maker All-Clad Metalcrafters, audiovisual equipment maker Peerless Industries, Chesapeake Bay Candle, and irrigation control maker ET Water Systems are among the companies that have recently shifted manufacturing of some items from China to the U.S.

Escalating Chinese wages aren’t the only reason. Electronics manufacturing services company AmFor Electronics, for instance, cited delivery responsiveness and ease of design revisions as reasons for relocating wire-harness production and some final assembly from China and Mexico to Portland, Oregon.

 The BCG analysis is part of an ongoing study of the future of worldwide manufacturing that the firm’s Global Advantage and Operations practices are conducting. A formal report on the latest findings is expected in the coming months.

About bcgperspectives.com

 BCG’s new online platform, bcgperspectives.com—available on PC, mobile phone, and iPad—features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management’s agenda. It also provides unprecedented access to BCG’s extensive archive of thought leadership stretching back almost 50 years to the days of Bruce Henderson, the firm’s founder and one of the architects of modern management consulting.

 About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries.

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