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Multinational manufacturersMoving back to America
The dwindling allure of building factories offshore May 12th 2011 | NEW YORK | from the print edition




“WHEN clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.

Labour arbitrage—taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.

“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.

The year 2015 is not far off. Factories take time to build, and can carry on cranking out widgets for years. So firms planning today for production tomorrow are increasingly looking close to home. BCG lists several examples of companies that have already brought plants and jobs back to America. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas. Sauder, an American furniture-maker, is moving production back home from low-wage countries. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia). Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.

BCG predicts a “manufacturing renaissance” in America. There are reasons to be sceptical. The surge of manufacturing output in the past year or so has largely been about recovering ground lost during the downturn. Moreover, some of the new factories in America have been wooed by subsidies that may soon dry up. But still, the new economics of labour arbitrage will make a difference.

Rather than a stampede of plants coming home, “higher wages in China may cause some firms that were going to scale back in the US to keep their options open by continuing to operate a plant in America,” says Gary Pisano of Harvard Business School. The announcement on May 10th by General Motors (GM) that it will invest $2 billion to add up to 4,000 jobs at 17 American plants supports Mr Pisano’s point. GM is probably not creating many new jobs but keeping in America jobs that it might otherwise have exported.

Even if wages in China explode, some multinationals will find it hard to bring many jobs back to America, argues Mr Pisano. In some areas, such as consumer electronics, America no longer has the necessary supplier base or infrastructure. Firms did not realise when they shifted operations to low-wage countries that some moves “would be almost irreversible”, says Mr Pisano.

Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest. And companies from other rich countries will probably continue to enjoy the opportunity for labour arbitrage for longer than American ones, says Mr Sirkin. Their labour costs are higher than America’s and will remain so unless the euro falls sharply against the yuan.

There’s no place like home
The opportunity for labour arbitrage is disappearing fastest in basic manufacturing and in China. Other sectors and countries are less affected. As Pankaj Ghemawat, the author of “World 3.0”, points out, despite rapidly rising wages in India, its software and back-office offshoring industry is likely to retain its cost advantage for the foreseeable future, not least because of its rapid productivity growth.

Nonetheless, a growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home. For many products, labour is a small and diminishing fraction of total costs. And long, complex supply chains turn out to be riskier than many firms realised. When oil prices soar, transport grows dearer. When an epidemic such as SARS hits Asia or when an earthquake hits Japan, supply chains are disrupted. “There has been a definite shortening of supply chains, especially of those that had 30 or 40 processing steps,” says Mr Ghemawat.

Firms are also trying to reduce their inventory costs. Importing from China to the United States may require a company to hold 100 days of inventory. That burden can be handily reduced if the goods are made nearer home (though that could be in Mexico rather than in America).

Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages. Increasingly, it makes sense to make things in a variety of places, including America.

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4,4
There is a fact that labor wages in manufacture industries in China have been rising rapidly, so in other emerging countries. considering of the dimining of labor arbtrige, multinationals have to reflesh the plans to arrangge their future development. But this work will be very hard because of the sophisticated product chains.

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4 4
The subject of this article is very clear, that is the American multinationals are moving back home. Even the author listed a series of examples to prove his opinion, I don't quite agree with him.
The author quoted Hal Sirkin's words, who said the production or consumption will be no difference to manufacturers by 2015. He seemed too optimistic to China's growing wages, but the growing is not as that fast. The multinationals' moving back cost which includes the already trained workers and constructed factories may highly overtake the cost they keep on manufacturing in China. And what is needed to pay more attention to is that the American workers may not be enough and willing to take such jobs. After all, the shift of manufactures from east back to the west is real, but it should take a longer time, may be in 2050s or later.

Follow u 4 4
modest appreciation适度升值。
Waiting this passage for a whole night. Thx 4 sharing.
The cost of labor should be the biggest variable cost of factory.But there is other fixed cost such as the fixed assets replacement cost，which would sour while the Inflation hits America and China. For each firm may choose to built a plant to have a scale production and own the labor the cost less. It will be a good choice for Multinational firms to move back if their native could offer both less cost.
All above is about this passage, but as a Chinese I would like to talk about the policy. Chinese government has been encouraging foreign companies to invest in China for 30 years.But still, the Innovation of China could not reduce the cost to a level similar them. Most of the Chinese manufacture companies used to rely on the cheap labor to compete offshore. While in motherland, Chinese factories often lose to multinational companies. It is time to make a change.China would not be a less cost labor offering any longer．It will be the biggest challenge for every manufacture firms to rethink about their competitive advantage.

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follow 2,2
American never want to see china developing.The profit earned very little,because the end of the industrial chain in China.Americans don't want similar wages to the Chinese. They want good wages that enable them to maintain a first class lifestyle.

1,1
I must admire the selecter's sight on such topic, which is embarrass and skeptical. Totally I don't agree with the author's conclusion. My main opinons are below.
1. The aim of U.S. companies in China are searching for labour arbitrage is true, but not the only reason especilly at present in China the cost of labour is rising so high spported by Lewis's point of inflexion in 2010.
2. The reason for off-shore trading is complicated and I think off-shore trading would have severial stages whcih are not the same inflecting the economic structures and scopes. Now China has been in a fast-changing period in all the industries especially the manufactures. China needs to improving the high-tech portion and consummating the supply chains when the developed countries had finished yet.
3. What the developed countries should do and have already been doing is enhancing technical upgrading. Any country should look forward instead of looking backward.

4.4
The USA is always the central of world manufacture,but it was not and will not be the central for build everything. Planes,computer  chips , pharmaceuticals and other high tech products are always thrive in the US. I think it is foolish for the US to attract the low tech manufacture department back to the US. Dispite of the fact that wages in China and other emerging market rises,it will take a really long time for the cost of labour and other factors to catch up with that in the US. And more important , the people in American will finally find it too expensive to buy every goods made in the US. That kind of inflation lever will surely be more dreadful than a moderate unemployment.

2,2
Labor arbitrage  is disappearing and the initial advantage of  cheap labors in China will  decrease .
A revolution on the economic system is on the way. Once success, we will not just to share the lowest profit of the supply chain.