Tuesday, 17 May 2011

Moving back to America.

Tuesday May 17th 2011



Moving back to America

 



“WHEN clients are considering opening another manufacturing plant in China, I’ve started to tell them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Made in USA?”


When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.


Labour arbitrage—taking advantage of lower wages abroad, especially in poor countries in outsourcing — has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China; for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.


“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.


The year 2015 is not far off. So firms planning today for production tomorrow are increasingly looking close to home. BCG lists several examples of companies that have already brought plants and jobs back to America. Caterpillar, a maker of vehicles, is shifting some of its excavator production from abroad to Texas. Sauder, an American furniture-maker, is moving production back home from low-wage countries. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia). Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.


BCG predicts a “manufacturing renaissance” in America. Rather than a many plants coming home, “higher wages in China may cause some firms that were going to move back in the US to keep their options open by continuing to operate a plant in America,” says Gary Pisano of Harvard Business School. The announcement on May 10th by General Motors (GM) that it will invest $2 billion to add up to 4,000 jobs at 17 American plants supports Mr Pisano’s point. GM is probably not creating many new jobs but keeping in America jobs that it might otherwise have exported.


Even if wages in China explode, some multinationals will find it hard to bring many jobs back to America, argues Mr Pisano. In some areas, such as consumer electronics, America no longer has the necessary supplier base or infrastructure. Firms did not realise when they shifted operations to low-wage countries that some moves “would be almost irreversible”, says Mr Pisano.


Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest. The best example of which is Apple, with a deal with Foxxconn, has decided to bring its production of iPhone and iPad not back to the US but closer to it. Brazil was chosen for offering reasonable labor costs and logistic facilities. And companies from other rich countries will probably continue to enjoy the opportunity for labour arbitrage for longer than American ones, says Mr Sirkin. Their labour costs are higher than America’s and will remain so unless the euro falls sharply against the yuan.


A growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home. For many products, labour is a small and diminishing fraction of total costs. And long, complex supply chains turn out to be riskier than many firms realised. When oil prices soar, transport grows more expensive. When an epidemic such as SARS hits Asia or when an earthquake hits Japan, supply chains are disrupted. “There has been a definite shortening of supply chains, especially of those that had 30 or 40 processing steps,” says Mr Ghemawat.


Firms are also trying to reduce their inventory costs. Importing from China to the United States may require a company to hold 100 days of inventory. That problem can be reduced if the goods are made nearer home (though that could be in Mexico rather than in America).


Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages.


Increasingly, it makes sense to make things in a variety of places, including America.

http://www.economist.com/node/18682182






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