April 29, 2014
A recent study from the Boston Consulting Group, which has been quoted frequently in several recent articles out this week, suggests that for a variety of reasons, American manufacturers may soon start to re-shore operations from China back to America. This prediction is based on a few factors: the changing costs of doing business in China versus America, the shifting landscape of American expectations on goods and services, and China’s shifting place as a growing world power.
According to one recent report, while there is still some cost advantage to manufacturing in China over America, that advantage is now only at a difference of 5%. In the past, American manufacturers exported operations and jobs to China because of lower labor and supply costs, and sometimes, because of the lower standards placed on manufacturers.
A report in Yahoo News suggests that American industrial jobs, which decreased by as many as 7.5 million since 1979, may be returning to American locations due to “falling domestic natural gas prices, rising worker productivity, and a lack of upward wage pressure.” Predictions suggest that we could see between 2.5 and 5 million manufacturing jobs return to the US by 2020.
In China, wages have risen by about 19% consistently since 2005, while at the same time the population of working-age citizens has decreased. China has an aging population with life expectancy increasing in many parts of China, while the birth rate decreases due both to the country’s laws on family size and the resulting low number of girls born each year, thereby further decreasing the fertility rate of the country. Further, the lack of protection for intellectual property rights in past years in China has caused as many as 58% of American manufacturers to report concern with continued business in China.
While it may be troubling that a major factor in this shift is the badly needed increase in China’s factory wages against the lack of similar wage increases in America, economists have been clear in the past about the implications of wage increases for manufacturing jobs.
At the same time, China has been taking some very interesting steps towards improved environmental standards. According to an article in Column F, China is already the world’s biggest investor in renewable energies and in the current Five Year Plan on energy, the country committed to achieving a rate of 11.4% of all energy use from renewable sources. Further, in 2013 China installed “12GW of solar capacity, equivalent to three times that of the total UK capacity, with plans for a similar amount this year. By way of comparison, the USA installed 4.3 GW of solar capacity last year….[Further, a] report earlier this year by the World Wildlife Fund claimed that China could have an electricity system in place by 2050 consisting of 80% renewable sources and that it would be substantially cheaper than using coal.”
As Column F notes, China has been able to increase their renewable energy capacity at a faster rate than many other countries because in much of China, these are new installations in areas that have not had electricity before, while other countries have to replace old structures first, which carries many political and financial trappings that must be dealt with separately.
China is facing environmental collapse and many instances of social unrest, but these movements towards greater environmental consciousness is excellent news, considering the great strain that it will place on the planet to bring higher living conditions to China’s huge population.
Right now, China is still listed by the BCG as the number one country for manufacturing in the world with the US coming in at second place. As China works to repair many of its internal problems and America focuses on meeting the demand for “Made in America” goods, it will be interesting to see how these changes will impact China’s growth as a world power, and America’s attempts to recover financially and improve our own environmental record.