The Great Manufacturing On-shoring

Tim Worstall at Forbes brings up an important point about the recent increases in wages and working conditions in China for major American tech companies. These manufacturers would allow wages and conditions to stagnate to maintain a competitive cost edge over other firms, but the inevitable Chinese labour shortages have increasingly given employees the upper hand. Wages increase of 20 per cent per year are increasingly putting pressure on manufacturers to lower costs elsewhere.

“It’s not cheap like it used to be,” laments Dale Weathington of Kolcraft, an American firm that uses contract manufacturers to make prams in southern China. Labour costs have surged by 20% a year for the past four years, he grumbles. China’s coastal provinces are losing their power to suck workers out of the hinterland. These migrant workers often go home during the Chinese New Year break. In previous years 95% of Mr Weathington’s staff returned. This year only 85% did.

Many of China’s cities are raising minimum wages to spur consumption and to redistribute wealth. On top of all of this, China’s labour force is expected to flatline next year. And after the grumbling of Western countries, China has started to let the yuan appreciate, if modestly.

The days of cheap labour and manufacturing in China are nearly over.

Meanwhile across the Pacific, the U.S. is still experiencing high unemployment above 8 per cent. Wage inflation is the least concern for Fed chairman Ben Bernanke. Labour unions, particularly in manufacturing, have been allowing unprecedented wage cuts. At the state level, governments have proposed cutting minimum wages and they have limited public union’s bargaining power. Huge injections of money over the past 4 years have depreciated the U.S. dollar.

Manufacturer’s are flocking to the U.S. – Automaker’s like Volkswagen and Kia are planning major expansions in the  U.S. Southern states where labour laws are loose and wages are low. G.E. and Whirlpool have been reinvesting in the U.S.for the first time in years, if somewhat tentatively. Movingproduction to countries like China is making less sense.

… the study, by management consulting firm Booz & Company and the University of Michigan’s Tauber Institute for Global Operations, suggests that for the first time in decades, moving production offshore is no longer a ‘no-brainer’ for the vast majority of companies producing for the U.S. domestic market.

China’s relative manufacturing competitiveness is destined to erode against the U.S. It seems that American manufacturing is only in the early stages of a renaissance that the U.S.economy sorely needs.