Lower Energy Costs, Higher Labor Costs and Increased Productivity are Major Contributors
Lower energy costs in the US and higher labor costs in China are helping to close the manufacturing gap in 2015. With lower transportation costs and other factors, will this be the year that manufacturing begins its return to the US?
BCG, the Boston Consultancy, estimates the average cost to manufacture goods in the US is now only 5% higher than China and is 10% – 20% lower than major European countries, as cited by Fortune Magazine.
They also predict that by 2018, it will be 2% – 3% cheaper to manufacture in the US than China.*
Lower Energy Costs in the US
The biggest contributors to lower energy costs in the US has been fracking. Being able to procure more oil on our own soil has led to a drastic decrease in energy costs for manufacturers in the US.
It is a very big deal in industries such as steel, aluminum, petrochemical and paper which use high volumes of energy.
Not only does it cost less to produce raw materials and goods but it also costs less to transport them around the country, saving manufacturers millions of dollars.
Although there are environmental concerns with fracking, mainly concerns about drinking water contamination, the benefits are abundantly clear for manufacturing.
It has been reported that the US has a 15 year jump on Fracking, with 101,117 fracking wells, followed by Canada’s 16,990. China has only 258 fracking wells.* With those numbers, it appears that the US could sustain the lower costs and manufacturing growth for several years.
Higher Labor Costs in China
Rising labor costs in China are the other major factor in narrowing the manufacturing gap with the US.
It is estimated that Chinese labor costs have a 17% Compounded Growth Rate from 2003 to 2010, from $1,534 to $4,579 per employee.* Costs are rising faster than in Vietnam, India and Mexico.
According to InterChina Consulting, as cited in the China Business Review*, China has reached a turning point and can no longer be considered a low-cost production base. It will likely never return to that status.
The Chinese are now beginning to focus on the other benefits of manufacturing in China, including high productivity rates, close proximity to a local Chinese market and high-quality supplier network, as well as high quality labor for the cost.
Business operations costs have also increased along with labor costs. Purchasing Price Indices increased, as well as utility prices and land rental costs according to Trading Economics.*
US Manufacturers are also considering other factors as they reshore production, including:
- Transportation costs from China
- Threat of port strikes
- Local investments and partnerships often required for foreign companies that do business in China.
With only 5% cost difference, these factors could be the tipping point to bring production back to the US.
In addition, the US has also experienced an increase in productivity in the manufacturing sector.
If companies can manufacture products for about the same cost in the US, we could see a major shift in manufacturing in the next few years.
What Do You Think?
How do you see your company benefiting from lower US Manufacturing costs? Will more of your business be done in the USA? Leave a comment below and let us know!
Fortune Magazine 6/26/15 “US Manufacturing costs are almost as low as China’s”
CNBC 4/18/13 “New Study Finds China Manufacturing Costs Rising to US Levels”
China Business Review 7/1/12 “China’s Rising Costs”
Trading Economics 7/15 “China Manufacturing PMI”