Rising Labor Costs Not the Sole Factor Influencing Potential U.S. Manufacturing Resurgence
18 September 2012 Consensus views on a U.S. manufacturing resurgence have largely centered on rising labor costs in markets such as China as the key driver of re-shoring back to the U.S. However, a new PwC US report, A Homecoming for U.S. Manufacturing?, reveals that while rising labor costs are part of the story, a range of factors — including transportation and energy costs and protecting the supply chain — could drive a sustained manufacturing renaissance in the U.S. beyond any cyclical recovery, potentially improving investment, employment, production output and research & development (R&D).
“Industrial manufacturers may increasingly rethink their U.S. strategies, including the merits of continuing to separate production and R&D and producing abroad and importing back to U.S. buyers,” said Bob McCutcheon, PwC’s U.S. Industrial Products leader.
Relocating manufacturing production in the U.S. generally holds greater advantages for some industries over others. When taking into account costs spanning labor, materials, transportation and energy, the PwC report shows that chemicals — including the manufacture of crop inputs — primary metals and heavy equipment manufacturing industries stand to benefit most from maintaining or expanding facilities in the U.S. given opportunities and cost incentives to re-shore domestically.
The PwC report outlines seven factors that may play key roles in making re-shoring decisions, as well as in determining whether or not the U.S. will become a more competitive and attractive market for manufacturing expansion:
Transportation and Energy Costs: The bull market in energy commodities over the last decade has contributed to a major increase in transportation costs for manufacturers with global supply chains. As a result, some machinery companies are producing more in the U.S. for sale in North America.
Currency Fluctuations: The U.S. dollar generally depreciated during the last decade, and China’s currency has risen moderately, which narrows the cost gap between producing in the U.S. and importing from China for domestic consumption. In addition, the secular decline in the U.S. dollar helps make the U.S. a potentially more competitive location to manufacture for exports.
U.S. Market Demand: While China and other emerging markets are forecast to continue to grow GDP at a faster clip than the U.S., the disparity in wealth, as measured by real GDP per capita, is expected to persist with the U.S. dwarfing China and other emerging markets. This difference in the relative standard of living, as well as the size of the U.S. market, supports investment in new domestic production of goods targeted for U.S. consumption.
U.S. Talent: The gap in the level of higher education and training between the U.S. and China has narrowed, though the U.S. still holds a significant advantage. It is possible that the U.S. workforce will remain competitive for the foreseeable future owing to institutional advantages in education and experience; however strength in emerging economies is growing.
Availability of Capital: Although commercial and industrial lending demand has recovered and credit standards have come back down from levels reached during the financial crisis, banks have resumed tightening credit standards. In addition, there is evidence that borrowing in China has become more difficult due to increased capital requirements for banks and tighter lending for exporters. The balance of risks favors some continued credit tightening in several key economies to stave off inflation.
Tax and Regulatory Climate: The U.S. now has the highest statutory corporate tax rate among developed countries as of mid-2012. While U.S. corporations tend to have a much lower effective tax rate, this and other factors have spurred talk of tax reform to boost economic growth and employment. Proposals include a lower statutory rate, tax incentives and increasing—or making permanent—the R&D tax credit.
U.S. Labor Costs: Higher labor costs in emerging economies, especially China, are challenging profitability for some industrial manufacturers. This concern might not ease as the Chinese government’s policies and the rising cost of living in urban areas add to wage pressures. From 2008 to 2011, China’s hourly manufacturing labor costs rose by over 80% and are expected to rise at a similar rate for the next four years. This compares with the estimated increase ofaround 10% for the U.S. over the sametime period.
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