A new report
by TD Bank predicts some manufacturing may return to the United States and Canada in the coming years.
“Onshoring is still in its infancy and largely limited to anecdotes. However, the scales are beginning to rebalance for some industries as global conditions evolve,” wrote Michael Dolega, a Toronto-based economist for the bank.
He said those changes include rising offshore labor costs in China, an appreciating Chinese renminbi, and other domestic advantages, including the boom in shale gas production.
"Additionally, an overarching theme of rising capital-intensity across the manufacturing sector continues to gradually erode the primary benefit of offshore-production,” he said.
Dolega noted “after a decade of employment losses, the manufacturing sector has become a key driver of the recovery adding nearly half-million jobs since the January 2010 trough.”
He also said a slowdown in offshoring activity has been an important component of the manufacturing recovery, accounting for about one quarter of the recent manufacturing job gains.
Dolega explained “For some industries – such as computers and electronics and plastics and rubber – offshoring activity has slowed to a trickle” and added those sectors as well as machinery, fabricated metals should "lead the onshoring trend, while the labor-intensive early-offshored industries – including apparel and textiles – will stay or move further offshore.
"Furniture, while not very capital-intensive, has nonetheless made some onshoring inroads recently,” he said.
Products such as petroleum, chemicals, primary metals, and food and beverage never really moved offshore in first place, but may “contribute to a manufacturing revival through improved competitiveness resulting in organic domestic- and export-led growth,” Dolega said.
Among the trends that may help manufacturing become more competitive in the United States and Canada are:
- Rising labor costs. Average Chinese manufacturing wages have grown from being 2.5 percent of those in America to about 10 percent today and will be 15 percent by 2015 “and the gap is expected to narrow through the foreseeable future.” And he said “all-in wages in coastal areas of China specializing in computers & electronics and transportation equipment production may approach one-quarter of wages in southern U.S. by 2015.”
- Productivity. Dolega said “labor productivity growth in China has not kept pace with the rapidly increasing wages. This has led Chinese unit labor costs (ULC) to double between 2001 and 2011. In contrast, the U.S. economy experienced a rise in ULC of less than 10 percent in the same time period.”
- Automation. He explained capital intensive industries “may attempt to add capital to increase productivity. Already, some firms have announced plans to replace part of their Chinese workforce by robots over the next several years as wage hikes make automation increasingly affordable. But, this trend will only serve to make these industries less labor-intensive and thus diminish the benefits of producing offshore in the first place.”
- Land prices. Dolega said industrial land prices are higher in parts of China than in the southern U.S.
- Exchange rates. He noted currency shifts are “escalating made-in-China costs” and that “most estimates based on purchasing power parity peg the renminbi as undervalued. This should put pressure on China to allow continued appreciation of its currency against the greenback.”
- Volatile shipping rates. He said “I think the consensus is, that going forward shipping rates are not going to stay at the levels they are at right now and that is one of the reasons potentially manufacturers will have to gauge how costs will increase in the future,” he told American Shipper in an interview.
- Inventories. He said “distant shipping routes increase the required size of a firm’s inventories tying up valuable capital. This opportunity cost can be especially detrimental for firms that use credit to fund inventories and favors shorter supply chains, though he notes credit conditions have eased somewhat since the recession. He said “the furniture industry, in particular, expected to make some onshore or near-shore inroads given the high weight-to-value of its products and the resulting high relative transport costs.” - Chris Dupin