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Manufacturing Outsourcing - Is the End Near?

Manufacturing Outsourced

It may come as a surprise amidst the stagnating American economy, but the U.S. manufacturing sector has been doing quite well for itself as of late: the sector has steadily added jobs since the beginning of 2010 at a rate of almost 3 percent — faster than the manufacturing growth in any other developed economy during that span. In fact, the U.S. has added more manufacturing jobs over the past two years than have the rest of the G7 countries combined. While the numbers aren’t staggering, and although employment numbers still fall below pre-recession levels, all signs indicate that the American manufacturing base is on its way up.

Several recent studies have called into question the decades-old maxim that outsourcing production to a developing country (ie to China and India) is cheaper for the American manufacturer. According to a report published by the Boston Consulting Group, American manufacturers will be only saving 10 percent when they outsource to China in three years and, from that point forward, the difference will only continue to plummet.

On what basis did the report make its prediction? Here are a few of the main areas it noted:

Wage Equilibrium: As critics and proponents of globalization have been predicting for over a century, wages in the developed and developing world have finally begun to move towards an equilibrium, according to the BCG study. In China, hourly rates that once stood under a dollar have jumped substantially and are expected to reach $4.50 by 2015 due to an increasingly crowded Western manufacturing presence in coastal cities. Meanwhile, the global recession has caused wage deflation in Europe and the United States and forced industries to cut back on pension plans and health funds, the aggregate effect of which makes the American worker a better deal than ever before.

Transportation and Shipping Costs: While the cost of shipping a product across the Pacific Ocean has risen alongside the spike in oil, the real brunt of rising energy rates can be felt in other places of the production cycle. It can be felt, for example, in the exorbitant costs of sending company executives back and forth between the U.S. and Southeast Asia. It can also be felt in energy bills at coal-powered Chinese factories — bills that have passed surplus charges onto overseas contractors.

Worker Productivity: According to the report, the average Chinese worker is only one-fourth as productive as the average American. Although productivity rates have been rising among workers in China — and although they can only be expected to further increase — we have also seen a gradual increase over time among Americans, thereby suggesting that China has a lot of catch-up to do on the productivity front. Meanwhile, other developing countries in China’s league either have similar productivity issues or a scarcity of workers in the first place.

Ultimately, then, with financial issues plaguing Europe and the developing world losing much of its manufacturing advantage, the United States has been able to close the gap and realize a small-scale revitalization in the sector. Although it is difficult to predict what the post-recession world may hold, an narrowing of the international playing field should spur continued growth in domestic manufacturing jobs. For the sake of the industry and of the American worker at large, let’s hope that BCG’s prediction is right and that this is the case.

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