For over 10 years now, outsourcing has been a dynamic, major force changing the structure of the world economy. Emerging markets offer what appears to be an endless supply of cheap labour, rapidly expanding domestic markets, attractive currency (low) valuations and governments warming up to the idea of foreign direct investment. China in particular has in recent history been a simple choice to make as a destination for companies seeking to produce abroad.
This trend continues in 2011. However, the rate of change is slowing. The management consultant firm Boston Consulting Group found that from 2001 to 2004, imports from China into the USA grew by around 20% per year. In the past few years this rate has slowed to around 4%. U.S. imports from other low-cost nations have largely flattened, and even declined in 2009. Last year, the “great sucking noise” (a term to describe the flow of manufacturing jobs out of the USA coined by presidential candidate H. Ross Perot in 1992), even went into reverse. For the first time since 1997, US manufacturing jobs increased, by around 1 per cent.
Reasons for this developing trend are many. China’s wages are under strong pressure to rise, currently increasing by 15-20% per year. The Yuan is continuing to appreciate against the Dollar. Additionally, demographics (the one child policy having a major impact) are not in China’s favor; the population (in stark contrast with that of India for example) is ageing. Some observers go as far as to ask whether China will ‘grow old before it grows rich’. Reliability concerns, a lack of transparency regarding government policies and a strong political bias towards domestic firms including blatant theft of intellectual capital leaves Western firms worried how much quality is being sacrificed for lower and lower labour cost-gaps. The labour cost-gap between the USA and China is expected to shrink to just 40% by 2015.
When taking into account higher productivity of US employees, better quality and lack of transport costs, overall savings are predicted to become marginal. This is why the Boston Consulting Group, has coined 2015 the “tipping point” after which, in certain sectors, manufacturing will be as attractive in the USA as in China. The firm predicts this to have a dramatic impact, bringing 2 to 3 Million manufacturing jobs back to the US, mainly from seven industries including transportation goods (e.g. vehicles and parts), electrical equipment and furniture. Additionally, $100 Billion in output gains are expected, lowering the US non-oil trade deficit by 20 to 35%.
Clearly, other low-cost nations will also remain attractive, most notably Mexico in regard to US manufacturers. However, these are very often not capable of handling high-end manufacturing on the scale of China due to lack of infrastructure, scale, domestic supply networks, worker productivity and, in several cases, corruption (to various degrees relative to China). Evidence is starting to point in the US’s favour; Ford, NCR, Master Lock and several other companies are examples of firms that have recently shifted manufacturing from China to the US. It is difficult to predict where manufacturing will be focused in 10 years. However, The Boston Consulting Group has a bold answer: “We’re on record predicting a U.S. manufacturing renaissance starting by around 2015.”
Further reading: http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-88775
Do you believe the same is happening in Europe at the moment?
ReplyDeleteYes I totally agree with you. I believe that given the constantly rising transportation and labour costs it will eventually become more difficult for emerging countries to sustain their competitive advantage as a world’s manufacturing destination. However what happens next is not very clear. In case of China I think that it will have to find another GDP driving force or face the major economic slowdown and unemployment. Probably China can take similar approach to what India did over that last few decades. Indian establish itself as a leading IT exporting, developing and manufacturing destination. However if we consider that India has one of the world’s largest concentration of PHD mathematicians this achievement would not appear as surprising. I believe that gradually China can do the same thing by focusing on a particular hi-tech manufacturing niche that would put it in advantageous position rather than only relay on intensive labour manufacturing. However this objective can not be achieve in one day. China will have to put an increasingly greater attention on its educational system in order to grow the portfolio of own specialists what would satisfy the westerns corporations’ need for highly skilled labour force.
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