According to a recent survey issued by the Boston Consulting Group, U.S. companies are planning to relocate much of the manufacturing they outsource to China back to their own shores.
The study interviewed 200 executives at of large manufacturing companies headquartered in the U.S. and discovered that 21 percent of them had already committed to returning manufacturing work done in China back to the U.S. or were planning to do so in the near future. Another 33 percent revealed that they were open to the prospect. The Boston Consulting Group conducted the same survey last year, interviewing the same respondents, and registered 10 percent and 27 percent respectively.
By a wide margin, the most common reason cited for “reshoring” plans is the rapidly rising costs of doing business in China, largely driven by escalating labor costs. Once a prime destination for those apparel companies looking for big production capacity and small costs, China’s swelling middle class is forcing it to reinvent itself in the global marketplace. While the average hourly earnings in the U.S. has increased approximately 1.6% each year, China has experienced breakneck growth of 15% to 20% per year.
The wave of reshoring could generate as many as 1.2 million new jobs in the U.S.
And there are other economic factors that indicate China’s manufacturing sector is headed for trouble. HSBC’s purchasing managers’ index inched up 50.2 in September from 50.1 in August. While that upward trend evidences an expansion of China’s manufacturing, it is a much more modest rate of growth than expected by industry analysts.
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A spokesperson for HSBC said, “The rate of growth (in the manufacturing sector) slowed to a fractional pace. Furthermore, growth of new work was unchanged from the previous month and only slight.”
Chinese export orders increased for the first time in six months but only very slightly, dampening any optimism that movement would typically engender. In fact, since new orders overall remained stagnant this likely means there was a net decrease in domestic orders.
Last July, an increasingly anxious Chinese government attempted to stimulate a languid economy with a basket of tax cuts for small businesses, investment in infrastructural development like railroads and various subsidies for exporters. Problematically, none of these measures seemed to have catalyzed any growth, though some experts believe they may have contributed to the stabilization of tempestuous economic performance.
Qu Hongbin, an HSBC economist, said, “Manufacturers’ restocking process continued but remained relatively slow. We expect continuous policy efforts to sustain the recovery.”
Regarding the future of Chinese manufacturing, it is difficult to issue predictions on the basis of available statistics since the full effect of reshoring won’t reveal itself for several years. Hal Sirkin, analyst at BCG, said, “These are leading indicators,” he said. “If you are going to have a plant up and running in 2015, you have to start planning in 2011, or 2012 at the latest.”