Thursday, May 05, 2011

And They Ain't Comin' Back--Or Are They?

Interesting piece in today’s WSJ on how rising costs abroad may lead to more U.S. firms bringing manufacturing home(sub req):

A combination of forces—rapidly rising labor rates abroad, loftier materials and shipping costs, deep-discount tax incentives from U.S. states—are changing some of the calculations by which companies decide to move production abroad, or even keep what's there now.

First some caveats: Employment at manufacturing companies in the U.S. may have dropped over the last 40 years. But those companies have gotten a lot more productive, and manufacturing output has actually risen. Companies are making — in the U.S. — more than double what they did four decades ago.

Can’t repeat that one enough.

Second, companies will certainly keep expanding production in places like China and India to serve those growing markets. It's the factories they have abroad building product for shipment to the U.S. market that are in question.

The forces at work are potent ones:

Wage rates are soaring in China as the market for skilled workers tightens and the previously mute labor movement finds its voice and agitates for higher salaries. This is cutting into the cost advantage that cheap Chinese labor provided U.S. manufacturers.

In many sectors, annual wage growth is running at 15% or more. And in higher value sectors, Chinese managers are earning as much as their Western counterparts.

"China's low-wage advantage will disappear over the next five years," Christian Murck, president of the Beijing-based American Chamber of Commerce in China, warned a gathering of corporate and trade officials in Washington Tuesday. "Supply chains are already being disrupted."

Then there's the rest of inflation: the tab for energy, raw materials, real estate, shipping. All are on the rise, rapidly boosting the cost of doing business abroad.

Meanwhile, real estate prices are still falling in most parts of the US and states are more willing than ever to dangle tax breaks and other financial incentives to get companies to set up shop. The fact that American companies are willing to move manufacturing operations back to the US is obviously great news for the economy and for American workers. But before we start getting carried away with too much triumphalism and football spiking, we should remember that a lot more could be done to make their home turf even more attractive for US manufacturers.

Another story in the WSJ detailed the problems that one particular company has faced in a piece called Chesapeake Bay Candle Struggles to Open U.S. Factory (sub req):

When Chesapeake Bay Candle decided to build a U.S. factory, founders Mei Xu and David Wang thought it would take nine months and cost $2.5 million.

But $3.5 million and 13 months later, the couple is still waiting for their final occupancy permit. A temporary sign is draped across the front of the beige concrete structure, a former liquor warehouse on the outskirts of Baltimore.

"I think our government needs to ask itself, 'Are we really ready for business to come back from Asia?'," says Ms. Xu, a Chinese immigrant who with her husband founded Pacific Trade International, the Rockville, Md.-based company behind the Chesapeake Bay brand, in 1994. "I'm not sure it is."

Rather than seeking to punish companies who outsource jobs to other countries, the United States would be much better served by looking for ways to become more competitive. That includes the corporate tax structure, regulations, and other legal reforms that lower the barriers that companies face when opening or expanding facilities in the country. While I’m not really a big fan of states and municipalities trying to outbid each other to attract jobs, in the absence of a coherent national strategy you can see why they pursue the opportunities. Instead of spending billions trying to “create or save” jobs through the stimulus two years ago, we would have been a lot better off had we taken steps to improve the business climate here, especially for manufacturing companies. Who knows, they might even decide to move back to the old neighborhood.