The New York Times article Is Manufacturing Coming Back to the U.S.? discusses the increasing and hidden costs of manufacturing in China, resulting in manufacturing in the U.S. becoming more cost effective.
Chinese manufacturing costs are going up due to rising labor costs, increasing transportation costs and the Chinese government decision to allow their currency to fluctuate - a decision that will very likely lead to the Yuan appreciating against the dollar.
The article also points out that in addition to rising costs, there are also cash flow disadvantages associated with the use of Chinese manufacturers.
We first noticed companies starting to shift manufacturing back to the U.S. several years ago. The companies moving manufacturing back to the U.S. at that time were firms that made products with high transportation costs relative to the value of product, and/or products with relatively small production runs.
Since we first noticed this shift we've become much more confident that the trend is real, and we expect many more companies will choose to manufacture in the U.S. in the coming decade. The key drivers include:
1. The increasing and hidden costs of off-shore manufacturing. These are described in the NY Times article.
2. Increases in shipping costs over the next decade. The NY Times article covers the recent steep increase in shipping container costs, but longer term costs will likely rise even more. Due to growing developing world demand, energy prices will continue to increase and demand for shipping will outpace supply.
3. A growing emphasis on cutting CO2 emissions. This will result in companies looking for shorter supply chains. Likely taxes on CO2 emissions will also make long distance shipping more expensive.
4. Automation and productivity gains by U.S. manufacturers. Increased automation and productivity gains reduce the wage advantages of manufacturing abroad.
5. The growth of niche and customized products, resulting in shorter production runs for a growing range of manufactured products. Shorter production runs reduce the cost advantages of manufacturing overseas.
6. Customer and political pressure. Former Intel CEO Andy Grove's Business Week cover story How America Can Create Jobs is a good example of changing attitudes around U.S. manufacturing. He is calling for a pro-U.S. manufacturing industrial policy. We expect more pressure from government and customers to manufacture in the U.S.
It is important to point out that while we believe the U.S. is becoming more competitive in manufacturing and some manufacturing will move back to the U.S., most won't. Mass produced products with long production runs will still be manufactured in lower cost countries.