BOSTON CONSULTING GROUPAUGUST 2011

Made in America, Again

Will manufacturing return to the U.S.?

Emerging factors that will close the gap for many goods consumed in the U.S. Rising wages in China High real estate costs in China Higher U.S. productivity Weaker dollar Low real estate costs in U.S. Higher transportation costs

China’s Dominance

China became the default location for plants during the past decade: Cheap labor Growing number of engineers Fixed currency Inexpensive land, free infrastructure, generous

financial incentives

China’s Dominance

2000-2009, China’s exports rose by a factor of 5 to $1.2 trillion annually.

Became substantial producer in world markets for: Apparel (32% of world market) Furniture (26%) Telecom equipment (28%) Office machines and computer equipment (32%) Ships (19%)

The U.S. lost 6 million manufacturing jobs, closed tens of thousands of factories during same period.

Manufacturing Again?

Though employment fell, manufacturing output in the U.S. actually grew during the last decade by one-third due to productivity gains.

Due to higher U.S. productivity, and rising wages in China, China’s cost advantage is dissipating: sometime around 2015, manufacturing will be just as economical in the U.S. as in China.

The reallocation of new production to low-cost states (such as Tennessee) has just begun.

New Manufacturing Math

China’s wage rates are growing rapidly, up 150% 1999-2006. Wages rose 19% annually 2005-2010.

And wage growth is faster than productivity growth in China.

Manufacturing wages rose just 4% annually in the U.S.

New Manufacturing Math

2000 2015(E)Wage rate ($/hr) 15.81 24.81Productivity (% of U.S.) 100 100Parts per hour 7.5 7.5Labor cost per part ($) 2.11 3.31

Wage rate ($/hr) 0.72 6.31Productivity (% of U.S.) 13 42Parts per hour 0.975 3.15Labor cost per part ($) 0.74 2.00

U.S. southern states

China Yangtze River Delta

Labor cost savings (%) 65% 39%

16% 10%

Total cost savings before transportation, tariffs, other costs

Tide is Turning

Which manufacturing industries will benefit? Those in which labor costs are small compared with total costs, and those producing relatively low quantities of goods.

Auto parts Construction equipment Appliances

Tide is Turning

Which manufacturing industries will NOT benefit? Those in which labor costs are high compared with total costs, and those producing relative high quantities of goods.

Apparel Shoes Furniture

Other Costs

Prices are surging in China: Price of electricity up 15% since 2010. Coal prices, utility rates rising. Industrial land no longer cheap; $10.22 sq ft in China,

compared with $1.30 - $4.65 sq ft in Tennessee. Shipping rates are rising: rising fuel costs, scarcity of

ships, and shortage of container port capacity. China’s currency is slowly appreciating v the U.S.

dollar.

China’s Future

Will remain a global manufacturing power.Multinational companies will not pull out of

China, but will orient production to serve local and Asian markets.

U.S. Future

Companies should evaluate carefully where to locate new plants; China should no longer be the default option.

Wage costs differences are still large but narrowing.

Productivity, transportation costs, energy, and other expenses are very important considerations.

U.S. will be increasingly more attractive for low-labor content goods that are sensitive to transportation costs.