WASHINGTON – An interesting story in the WSJ focused on how some US companies are looking at the prospect of bringing back to America the production of items that they outsourced to China. As the article explains, the advantage of lower Chinese labor costs is becoming less compelling. Wages for Chinese workers, while still substantially lower than prevailing US wages, are going up. Besides, the introduction of more and more automation in US manufacturing operations is making labor costs less important.
Cheap electricity
On top of that, the US natural gas revolution (thanks to shale gas) has created a new American competitive advantage when it comes to the cost of electricity. US factories now enjoy lower energy costs, thanks to relatively low electricity rates. Which is to say that America has become more competitive when it comes to establishing here at home new manufacturing operations.
We outsourced the supply chain
This being the case, why is it that most of what we buy is still made in China? Very simple. Over time, we did not just outsource to China the manufacturing of this or that item. We have outsourced all the supply chains.
Today, a Chinese manufacturer that has ben entrusted with making small domestic appliances for a US brand benefits from a complex, highly sophisticated network of suppliers and vendors, quite often located in the vicinity of his factory, who will provide the electric motors or circuitry –as needed– according to precise specifications. Furniture makers have their own networks of companies that will produce and deliver upholstery, paint or knobs. Within China, these suppliers networks operate quickly and efficiently.
Impossible to recreate sectors long gone
We do not have this in America any more. And this reality of a much diminished industrial eco-system illustrates the difficulty to bring back to America the production of specific manufactured items.
For example, if we are talking about small domestic appliances that require electric motors, well, nobody makes these motors in large quantities in the US any more. Recreating from almost zero an industrial base that could then supply new “insourced” manufacturing would be a really daunting effort. For this reason, the US brands will continue to have their blenders and hair dryers made in China, even if Chinese costs over time will keep going up.
So, here is the picture. Given low electricity costs and reduced reliance on manual labor, some outsourced manufacturing may be brought back to the US. But only some. China is now a reliable industrial products supplier, because the entire supply chain for most consumer products migrated to China long ago. It is now firmly established there; and it works. We cannot transplant it back to the US. This may be desirable; but it is impossible.
Focus on new technologies
What we can do instead, is to establish here in the US the solid foundations for brand new products that do not rely on established supply chains. New technologies, new products, a new industrial base. But let’s forget about yesterday’s consumer electronics or household appliances. They are gone –for good.