The Chinese Dragon Weakens

There was a time in the 1950s that manufacturing was the kingpin of the U.S. economy. At the time, the U.S. produced more than 40 percent of everything manufactured around the world.

More importantly, the explosive growth of manufacturing after World War II provided millions of Americans with good-paying, stable jobs. We may never return to that time again, but there are signs that America’s manufacturing slide is about to rebound from a 40-year slump.

A recent study by Boston Consulting Group reveals that the large advantage China has leveraged to siphon manufacturing jobs away from the United States may be softening. The tipping point may come as early as 2015, according to the study.

“Greater automation would undercut the primary advantage of outsourcing to China, which is access to cheap labor,” says Harold L. Sirkin, a BCG senior partner and lead author of the study. “Once companies carefully look at all the costs, many will find they’ll be better off making their products closer to customers in the U.S.”

Over the past few decades, China has been a major beneficiary of manufacturing jobs once performed here. Low-cost labor, and a large available pool of it, allowed the Chinese to undercut existing manufacturers.

But labor costs in China have been growing at 15 to 20 percent a year, according to the consulting firm, while shipping costs and rising land prices are making it a less attractive option.

Boston Consulting’s study estimates that within four years, China may be only 10 to 15 percent below U.S. manufacturing costs, which would mean that companies would be less likely to use overseas labor.

To put things in perspective, about 15 percent of California jobs were in manufacturing two decades ago. Today, manufacturing accounts for only 8.8 percent of the state’s employment.

In San Diego, there were 120,000 working in manufacturing in 1991, or about 10.6 percent of all jobs. Midway through 2011, there were only 92,000 manufacturing jobs in the county, or just 7.3 percent of all employment.

A resurgence in domestic manufacturing would be a boon to the national economy. Manufacturing jobs are often good-paying jobs to skilled workers. And workers learn additional skills as the nature of manufacturing changes, making these longer-term jobs than the ones a lot of Americans now have.

The study says some manufacturers are already relocating factory work from China to nations with lower labor costs, such as Vietnam, Indonesia, and Mexico. But, it adds, these countries may not be able to absorb all the higher-end manufacturing that otherwise would go to China because they lack the infrastructure, skilled workers, scale, and domestic supply networks. It predicts that Chinese manufacturing will remain important for some U.S. companies because China is the world’s largest growing consumer market, and because U.S. companies will still need to manufacture goods for sale in the Asian markets.

Offshore manufactutring, the Boston study concludes, may always remain a viable option for U.S. companies, but China will no longer be the default option, the study concludes.