Reindustrialization in USA - Euler Hermes

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Euler HermesEconomic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesReason #1Lower labor costsThe combination of high output, productivityand profitability, and low unit labor costs lays asolid foundation for continued strength in theU.S. manufacturing sector. This section analyzesthe positive contribution of falling labor coststo U.S. competitiveness. We argue that thiscontinuing trend will be a major determinant of thereindustrialization momentum. This performancerelative to China and Europe, for instance, must becultivated. However, a too conservative U.S. wagepolicy and low labor pricing could eventually capproductivity gains and human capital accumulation,especially for niche industries.Competitiveness: advantage U.S.A.u As shown in Figures 12 and 13 below, comparingU.S. trends regarding manufacturing productivityand unit labor cost with the other leading industrializedcountries underscores America’s enviable position.Indeed, U.S. manufacturing has dramaticallyreinforced its productivity over the last decade andcut its unit labor costs by more than 10% (on U.S.$basis). In contrast sharply with its global competitors,it should be noted that the falling U.S. dollar versusthe euro may have contributed to the difference.Additionally, from 2000-2010 manufacturing productivityin the U.S. has grown at an annual rate of5.2%, greater than most industrialized nations exceptfor the rapidly emerging economies of Taiwan, theCzech Republic, and South Korea. At the same time,the U.S. has been one of only two major countrieswhere manufacturing unit labor costs have actuallyfallen. While this is a significant competitive advantage,it arises from the fact that productivity hasgrown sharply while real wages have hardly changedat all.12. Manufacturing Labor ProductivityIndex basis 100 = 200213. Manufacturing Labor CostsIndex basis 100 = 200216Source: Bureau of Labor Statistics, Euler HermesSource: Bureau of Labor Statistics, Euler Hermes
Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesEuler HermesA new era of manufacturing: “on-shoring”The Chinese competitive edge in laborcosts has been so overwhelming that itoften eclipsed all other parameters in theeconomic and strategic equation. Therefreshed set of parameters of “Made inAmerica” (cheap energy, supply chain riskmanagement, etc.), are major advantagesto on-shoring. Other factors includequality, easier communication, faster timeto market and cheaper inventory costs.u While real American labor costs have barelychanged over the past decade, the dramatic increasein Chinese wages has resulted in a steady erosion ofthe gap between American and Chinese wages. Forthe previous two decades this gap had been a crucialincentive for U.S. manufacturers to relocate industrialfacilities to China. Although there is no doubtthat the Chinese competitive edge is likely to remainsignificant for a while, the recent years have markeda tipping point in the industrial relationship betweenthe two countries wherein the wage gap will shrinkenough to become less important.Figure 14 below points to a sharp increase in Chinesewages, fueled by buoyant economic growth despitethe determination to keep inflation low, resulting ina sharp closing of the wage gap. Combined with thedepreciation of the U.S. dollar versus the Chineseyuan, the supremacy of China as the best locationto manufacture is likely to be weakened in any case.The current and foreseeable global environment maypave the way toward the on-shoring of industrialcapacities in the U.S. We assume the on-shoring ofmanufacturing capacities will mainly affect produc‐tion currently based in China but aimed at the U.S.market. This trend does not imply that the U.S. companieswill automatically scale back their operationsin China.The sectors expected to be the most proactive inon-shoring in the short and medium term can becharacterized by two conditions:• high exposure to labor costs in their coststructure; and• the ability to absorb higher labor costs by havinga lower labor cost component of value-added.Table D and Figure 15 below summarize the first andsecond tier of sectors which would initially participateand contribute to on-shoring. The activity potentiallyaffected by on-shoring these industries from China tothe U.S. would be equal to the current exports to theU.S. from China in these two industries. This amountis estimated to be $282 billion annually. ©D. The Candidates for On-shoringTier 1: Four sectors representing 56% of the U.S.imports from ChinaComputer and electronic product manufacturingU.S. import from China (in 2011)MachineryFurnitureMiscellaneous product manufacturingTier 2: The ChallengersFabricated metal product manufacturingElectrical equipment and appliancePlastic and rubber productsNon-metallic mineral productsSource: Bureau of Economic Analysis, Euler Hermes$146bn$21bn$15bn$36bn$17bn$29bn$12bn$6bn14. Effective Manufacturing Wage Gap302520$7USChina15. Part of labor costs in total operating costs and part of the value consumed by thelabor costs for each manufacturing sector in 2011, in %0.70.60.50.40.31510$170.20.100 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 150200620072008200920102011assumptions:wages and yuan grow at historical rate 2006-19US worker 3.4X as productiveSource: Federal Reserve, Bureau of Labor Statistics, Ministry of Labor andSocial Security of China, Boston Consulting Group and Euler Hermes2012201320142015Wood product Non-metallic product Primary metalFabricated metal productMachineryComputer andElectrical equipment Motor vehicleelectronicOther transportationequipmentFurnitureMiscellaneousmanufacturingFood and beverageTextileApparel Paper PrintingPetroleum andcoal productChemical Plastics and rubber Linchpin (median)Source: Bureau of Economic Analysis, Euler Hermes17
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