To paraphrase the late, great American novelist Mark Twain, reports of the death of manufacturing in the United States are greatly exaggerated. Yes, the nation’s service-related economy continues its long boom, employing millions of workers, while manufacturing output and jobs remain below pre-recession levels. But upon closer inspection, one can conclude that the business of making things remains as much a part of America as Twain’s long legacy.
Manufacturers today are evaluating the US as a potential location for new or expanded facilities. A recent MIT study1 reports that nearly 14 percent of 200 manufacturers polled confirmed that they are moving, or “reshoring,” production operations back to the US from overseas.
For example, a multinational equipment manufacturer is building a new factory in Texas, which will produce some equipment previously made overseas and exported to the US. And as a result of the US shale gas boom, some chemical producers are constructing ethylene production plants in the Southeast to take advantage of more affordable feedstock.
Working with manufacturers on the front line every day, we’ve observed that when considering the US for its operations, manufacturers evaluate seven critical areas: rising transportation and energy costs; market demand; rising labor costs in China and other developing nations; access to talent, tax, and regulatory policies; availability of capital; and currency trends. They look at how such a change will affect all areas of the business.
A potential manufacturing resurgence in the US won’t be an overnight phenomenon, and not all manufacturing sectors will be impacted equally. Building new factories or expanding existing facilities is an expensive, time-consuming investment. But the fact is that many of the reasons that manufacturers had in the past for offshoring factories are clearly trending the other way.2 (See Figure 1.)
Summary of manufacturing attractiveness trends for the United States
While the cost of transporting raw materials and finished products from foreign factories to the United States keeps rising, the cost of powering US factories is, in some cases, falling. The cost of fuel for aircraft, ships, trains, and trucks has gone up dramatically over the past two decades, a direct consequence of rising oil prices.
In September 1992, the price of a barrel of oil was just under $22; 20 years later, it averaged $112 per barrel.3 Conversely, the price of natural gas in the US continues to plummet, the result of the ongoing extraction boom from vast new domestic shale gas sources.4 In turn, a growing number of US manufacturers benefit from the lower cost of energy and feedstock, and utility companies switch to cleaner-burning, lower-emission natural gas from coal and oil to generate power.
These divergent trends can have far-reaching consequences for certain manufacturers, creating conditions favorable for producing in the US. Generally, the heavier manufactured goods are, the higher the costs are to ship them, a value-to-weight ratio that expands along with distance from where they’re made to their market destination. High transportation costs—along with those for labor and inventory—are why some production of heavy construction equipment and steel products, for example, is moving from existing factories in China to new ones in the US, where they’re also sold. In the case of US steel manufacturers reshoring from China, for example, shortening the supply chain presents a real benefit. (See Figure 2.)
Some industries, like steel products, will see a greater benefit to manufacturing in the US over markets like China
Meanwhile, the growing abundance of natural gas in the US provides not only more affordable energy for factories, but also new opportunities for products and services. For instance, a US maker of steel products has invested more than $100 million in a Midwest plant to help meet demand for tubes and pipes used in shale gas extraction activities.
Several petrochemical companies are building crackers—specialized refineries that use shale gas as feedstock to produce derivatives like ethylene and ethane—which could foster a potential export market and downstream product development. What’s more, PwC estimates that high shale gas recovery and low prices could add 1 million US manufacturing jobs and reduce natural gas costs by up to $11.6 billion annually through 2025.5
Concerns over transportation costs are motivating companies to alter their supply chains to help reduce costs and diversify supply-chain risk. Global manufacturers’ supply-chain risks have become especially relevant in recent years, influenced by both natural and manmade events. For example, the 2011 earthquake and tsunami in Japan led to widespread supply-chain disruptions across various manufacturing sectors. Numerous suppliers’ operations were completely or partially destroyed, forcing manufacturers to scramble for alternative sources. Automakers in the US are still recovering from the impact. Likewise, historic floods, tornadoes, and other natural disasters have seriously disrupted supply chains and business continuity.
Supply chains also are affected by transportation, energy, and labor costs, making suppliers’ locations critical, too. Protection of intellectual property rights held by suppliers—of both products and processes—has become increasingly important, especially in developing countries where government policies are lax. Proximity to research and design sources, internal and external, is critical to manufacturers that need to keep production and design close to each other to speed up changes.
These supply-chain risks support multinational manufacturers by geographically diversifying their supplier base and reinforcing the so-called “China plus 1” model—a strategy that establishes or expands Asian bases outside China, particularly in Vietnam. Companies are increasingly seeing that a more balanced supply chain spreads risk around to several global regions.
Consumers and businesses in the United States are slowly recovering from the nation’s stubborn economic crisis, an affirmation to global manufacturers that the US is still one of the world’s largest and most attractive marketplaces. While China, India, and other emerging economies may be growing at a faster clip, real GDP per capita in the US is unmatched.6
Consumer purchases in the US for autos and other durable goods are rising, triggering an uptick in factory orders over the past year. More importantly, the hard-hit housing market began picking up in the third quarter of 2012, which, if it holds, will positively impact the construction and related supplier and retail sectors, as well as the employment outlook.This is promising for manufacturers, foreign and domestic, that adopt multi-region strategies for producing goods in countries where they’re marketed. It’s leading to increased reshoring activity in the automotive, chemicals, and heavy equipment sectors. This factored into Airbus’ decision to invest $600 million to build a factory in Alabama, where the French company will produce its A320 passenger jets to compete with Boeing’s 737 in the lucrative single-aisle airliner market.
The closer-to-market trend, coupled with factors such as transportation and labor costs, naturally affects the supply chain, too. As witnessed in the 1980s and ’90s, when Japanese automakers built assembly plants in the US and gradually attracted suppliers from Japan to also relocate, a similar supply-chain migration could occur. Finally, this could also signal significant M&A activity within manufacturing sectors.
One of the primary reasons US manufacturers offshored operations to China and other emerging countries was the low cost of labor relative to that in the US. But the situation is changing as wages in developing nations rise alongside demands from emerging middle classes for better working conditions.
The US still has a wide margin in its labor costs versus those in much of the world. In 2012, average US manufacturing sector hourly wages were estimated to be $33.70 greater than those in China; by 2016, that premium is forecast to be $35.61. Even though the gap is expected to increase at a slower rate in coming years, labor arbitrage alone will not spark a resurgence in US manufacturing. Instead, labor costs should be factored in by sector. For example, because transportation costs in consumer electronics are considerably lower than in heavy equipment, differences in labor costs become significant.
Labor costs will affect manufacturers that adopt regionalized strategies—locating production operations to match market demand. Companies moving or expanding manufacturing in the US concentrate on Southern or Midwestern states where hourly wages are relatively low compared to other states. Along with tax, regulatory, real estate, and other incentives, site selection in the US demands broad consideration.
Sometimes lost in the labor discussion is the specialized talent factor. Though developing countries are graduating a growing number of engineers, computer scientists, and other specialists, the US still boasts the most skilled, highly trained workforce in the world. To maintain that edge, the government has created policies and private initiatives, many of which manufacturers can use.
Companies with production facilities may want to explore ways to become involved in STEM (science, technology, engineering, mathematics) education. They may be able to coordinate with local high schools, technical schools, and community colleges to participate in advanced manufacturing workforce training.
Executives charged with facilities site selection can also familiarize themselves with the growing number of US states with programs that entice foreign and domestic manufacturers with, among other incentives, guaranteed participation in job training.
At the same time, the US manufacturing community asks itself if the American public has a realistic perception of the industry, different from the bygone image of a dreary shop floor that’s a dirty, dangerous place to work. Among the deciding factors on where to locate facilities in the US is the availability of a trained or trainable workforce, as well as local programs and incentives to attract and retain talent.
Access to capital to expand or build new production facilities also affects manufacturers. Since the financial crisis in 2009, lending demands recovered and credit standards eased. While constraints still exist, like the availability of capital and tightening credit in the capital markets, the US is still the most robust capital market. In addition, borrowing in China has become more difficult due to increased capital requirements for banks and tighter lending for exporters.
And on the global currency front, the US dollar has generally depreciated while China’s currency has risen moderately. This narrows the cost gap between producing in the US and importing from China for domestic consumption. The weakening US dollar, particularly against the Chinese yuan, also helps make the US a potentially lower-cost location for exporting manufactured goods to other countries.
It’s no surprise that tax and regulatory policies in the US have a definite impact on manufacturers. The federal corporate tax rate, currently the second-highest in the world, remains a challenge, as does regulatory uncertainty. There is widespread, bipartisan agreement at the federal level that tax and regulatory reform is needed. This has long been advocated throughout the business community as a way to spur economic growth and employment.
A major caveat, though, are state and local tax and regulatory policies. Individual states and municipalities initiated tax incentives to attract domestic and foreign manufacturers. Competition for jobs and investments can be fierce, so many US state and local governments dedicate discretionary cash grants, tax credits, tax abatements, and other incentives to attract new jobs, expand tax bases, and stimulate economic growth. Companies need to carefully analyze—and quantify—the potential impact of these measures early in the process to maximize available incentives. Often companies make the mistake of announcing intentions to locate within a region before they evaluated their incentive options—and later learn of lost opportunity.
Just as multinational manufacturers are eager to place their stake in the fast-growing markets in Asia-Pacific, Brazil, and even Africa, some manufacturing companies are rethinking their United States strategy.
They’re considering whether it makes economic sense in the long term to produce abroad and import back to US buyers. They’re also rethinking decoupling R&D (in the United States) and production elsewhere (for example, in China). And, for some manufacturers, it makes sense to follow a multi-nodal or multi-regional path—that is, developing and producing in the markets to which they sell.
While there was a distinct advantage for some US manufacturers to produce in China or other far-flung markets, these conditions are in flux and tipping away from advantages. Re-transplanting production and R&D from foreign domains back to the United States may not be the best choice for all, but for others it makes sense.
Which industries will be most affected by the potential resurgence
The advantages of re-shoring to the United States are more closely aligned with heavy manufacturers, such as the metals and chemicals subsectors. For instance, light manufacturers, reliant less on transportation costs and more on labor costs—such as electrical equipment—may find re-shoring a less persuasive business strategy.
This strategy is also influenced by the pace of commoditization within an industry, as well as industry structure, both which can dictate the relative importance of these costs. For example, a lack of economies of scale and scope among existing constituents can encourage competition from new players and lead to a greater focus on mitigating specific cost advantages. In addition, the relative levels of strategic and economic value should be considered in locating production.
Manufacturing companies—as well as their suppliers and customers—will consider the following:
Such a shift back to the United States would not only reduce unemployment, but also increase investment in R&D. Indeed, there is historically a strong link between manufacturing and domestic R&D investment, with 70 percent of all private funds spent on R&D in the United States coming from this sector.7 Notably, companies that have moved production back to the United States—or are opening new production facilities there—have often cited R&D location as a factor. For example, one company cited the importance of collocating manufacturing and knowledge workers when relocating a plant from Mexico to the Southern US.
While there isn’t yet enough data to conclude that we are in the midst of a United States manufacturing resurgence, driven by the re-shoring of United States companies and greater domestic investment by foreign entities, our analysis indicates that a number of factors make the United States competitive for manufacturing expansion. This includes a combination of re-shoring and foreign inbound investment when primary customers are in the United States. Clearly, whatever approach companies choose, the United States is emerging as a more attractive market for manufacturers in the long term.
1 MIT, Made in America: Rethinking the Future of US Manufacturing, 2012.
2 PwC, A homecoming for US manufacturing?, September 2012.
3 Energy Information Administration, http://www.eia.gov/forecasts/steo/report/prices.cfm.
4 PwC, Shale gas: a renaissance in US manufacturing?, December 2011.
6 PwC, A homecoming for US manufacturing?, 2012.