America prepares to re-shore manufacturing

We have been following trends in manufacturing in this secret, surprising locale – the United States – for more than ten years. Shocking, avant-garde behavior? It shouldn’t be – the United States remains the world’s largest manufacturer, though statistical debates rage as to whether China has actually overtaken the U.S. for the top spot. Either way, China has been gaining fast, the U.S. is less reliant on manufacturing for it’s GDP, and trends in both countries are fascinating and essential if you want to forecast the future of the world economy.

Derek Singleton at the Software Advice’s Manufacturing Blog sees U.S. manufacturing as resurgent, and that American companies should start strategizing now for the coming wave of “re-shoring.” They report some surprising drivers:

More manufacturers are bringing production back to North America. We think the three main drivers of this trend are:

• Increases in the cost of ocean freight transportation, which has increased by as much as 150% since the 2008 lows;
• Longer product delivery cycles that make domestic manufacturers less responsive to consumer demand; and,
• Poor production quality standards that have resulted in the delivery of defective goods.

The cost issue is really the key trend driver – increasing the price of shipping would be as easy as a spike in oil prices, and cost of doing business in China will no doubt increase as the nation’s infrastructure spending burns along at 10% of its GDP. Singleton’s view on macroeconomics make sense as well:

The rising cost of Chinese labor is prompting domestic manufacturers to reconsider their off-shoring habits. Last year, Chinese inflation rose to 5.1% – its highest level ever. Sure, Chinese manufacturing remains far less expensive, but a trend toward higher costs is clear.

People talk of the Chinese economic miracle – the last bastion on Earth with that incredible 10% GDP growth! Well, that means inflation of prices too – likely some of the same prices that make manufacturing there so attractive.

Our colleague Paul Denlinger told us in his podcast that the Chinese strategy may be to develop a sizeable middle class to buy up its manufacturing output. At the same time, the U.S. could return to manufacturing for its domestic market as well. Very 1970.

This may answer the question, “What will the U.S. do for a living?” Answer: make stuff.