More evidence that “on-shoring” may gain currency

The Boston Consulting Group (BCG) provided more details on its supply chain job-growth forecast.

As reported here yesterday, analysts see an emerging trend that is expected to accelerate starting in the next five years. 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 Harold L. Sirkin, a BCG senior partner and lead author of the analysis., 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.