Could The Revival of U.S. Manufacturing Mean China Has Lost its Edge?

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There was lots of scepticism about a piece in March called “U.S. Manufacturing – The Great Comeback No One Will Believe” about the revival of U.S. manufacturing as China loses its cost advantage. But I continue to find evidence that the piece was spot on.

I had a good talk with Scott Huff, a principal at Innovate International, which does product development work and contract manufacturing for several industries. Scott’s story is worth passing on because the arc of his career in the last 10 years tells the story better than any set of statistics.

Scott is a design engineer. He started going to China in the mid-1990s to do work for clients. Huff was living in Chicago at the time. Every year, the travel got heavier as more and more clients manufactured in China. “So in 2004, after spending three months in the country in two-week blocks in the first half of the year, I figured maybe I ought to just move here,” Scott recalled. “My wife is pretty adventurous. So we moved lock, stock and barrel to Shenzhen and started rebuilding the business there.”

There were tons of opportunities, and the business grew. Things went well. Then, last year, it started to change.

‘In the middle of last year,’ Scott said:

‘I realized it when I was getting price quotes for some injection-moulded plastics. Chicago used to be a centre of excellence for this, and it’s since been decimated by overseas competition. But there were a handful of the old hands that survived. They kept up with the technology and got very lean and efficient, using electric presses and things like that that reduce cycle times and labour.’

He continued:

‘Suddenly, prices from them weren’t that different from what you could get in China when you factored in transportation costs. It looked better and better as we took another big labour increase in China in the third quarter of last year. Of the last four out of five jobs I quoted for injection moulding in the U.S. versus moulding in China, the U.S. won. Most people don’t believe me when I tell them I’m getting better prices in the U.S. The first instinct people have, the paradigm that they’ve learned to live with, has been to bid work in China.’

Your editor sympathizes with this. I’ve had a lot of people shake their head in disbelief and call me crazy when I tell them it is (sometimes) cheaper to manufacture in the U.S. now. But here you have a real-world tale from a man on the ground seeing this new trend unfold in real time.

“Things are getting expensive in China, pure and simple,” Scott told me. “Labour costs have gone up substantially in China. That’s not a mystery to anybody. The amount of labour available at any price for some jobs is just not there. If you want to polish a piece of stainless steel for the kitchen industry or tie rawhide pet treats, you’re going to have a tough time finding people. People have options. They’d rather put together an iPad now.”

Even though labour costs have surged, one could argue they have not kept pace with the cost of living. “Food prices in China are ridiculous,” Scott says. “It’s a hell of a lot cheaper to live in the United States than it is in China if you equalize people’s incomes. As a percentage of someone’s income, the chunk for food is a huge line item there. Land prices have been skyrocketing everywhere. Apartment prices are through the roof. It is cheaper to live in the U.S.”

Remarkable, isn’t it?

So business is just starting to move away from China. Manufacturers are seeking out cheaper markets in Southeast Asia. Scott has a new plant there already, in Cambodia. “Cambodia is small but in a good location,” Scott says. “Right in the middle of everything, really.”

His company is also moving business to the States. When I caught up with Scott, he was in Knoxville, Tenn. He is still a resident of Shenzhen, China. That’s where he officially lives. But his kids are going to school in Tennessee, and he is looking to build a business back in the States. It’s a complete reversal of what happened eight years ago.

“I don’t think anybody has any idea that’s happening,” I said.

“It’s sneaking up on people, but they’re going to realize it. The handfuls of survivors in the moulding industry in the U.S. are busy as hell right now. It’s not just the plastics industry. Anybody that was left here with manufacturing intact is getting extremely busy.”

“So it seems there would be an opportunity in U.S. manufacturing,” I said. Scott agreed, with a caveat.

“There is an issue that we’re battling. The U.S. lost an entire generation of toolmakers. They’re just not there. The old Polish toolmakers I used to work with in Chicago have all retired, or if not, they are more gray-headed than I am. And there aren’t the apprentices ready to step in. You can’t find a good toolmaker in Chicago right now. It’s hard to come up with. And the skill set you can’t just turn it on and off like a faucet.”

This is something people especially political types — overlook. It’s not just a matter of bringing back the jobs. The skill set has to be there, and that takes time to build.

“Technology changes, too,” Scott added, “so it is extra hard to find someone who’s kept up with it all. You can still cherry-pick and pull out a tool in Asia and bring it to the U.S. You just have to figure out a way to maintain it without a toolmaker.”

“Wow,” I said, “that’s a complete reversal of what went on before where people would take machines from the U.S., disassemble them and ship them to China.”

“I was one of them,” Scott said. “Now I’m designing products from China and carrying them to Chicago for production. Touch base with me in a couple of months and I’ll let you know how it went.”

I said I would. In the meantime, we’ll continue to watch this story. China losing its once-formidable cost edge would have a sweeping impact on manufacturers everywhere. Stay tuned…

Regards,

Chris Mayer
for The Daily Reckoning Australia

From the Archives…

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Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
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Garry
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It’s a good story, and one that a lot of market watchers have entirely missed, whereas China seems to be their be-all. So long as punters swallow their paid expert rubbish, then the media will always be ten minutes behind the curve. The US has been on a good track since Obama realised a game change was in order – That is, put some brakes on the paper shuffling way of life and encourage businesses to actually make things. American consumers being what they are, now like to see a made in the USA sticker in front of them, making… Read more »
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