After offshoring jobs for much of the past two decades, US manufacturers have reversed course over the past few years as rising oil prices have pushed up the cost of transportation.
Now, the rebound looks as if it could turn into the revival of US manufacturing.
Although US manufacturing activity remained near a three-year low in the third quarter, global management consulting firm Boston Consulting Group projects that by 2020 up to 5 million jobs could be created by manufacturers in the US, who would in turn export a larger share of US-made goods, particularly to China.
Indeed, a PwC analysis suggested structural changes could sustain the return of manufacturing jobs to the US, also known as re-shoring.
Manufacturers of steel and wood products and chemicals are especially likely to benefit from trends in currencies, exports and transportation costs. Contrary to common belief, China’s labour costs play only a minor part.
“Some manufacturing companies are rethinking their United States strategy,” the PwC analysis concludes. “They are rethinking whether it makes economic sense in the long term to produce abroad and import back to United States buyers.”
Already, the US industrial production index recovered 13 of the 17 points it had dropped between February 2008 and June 2009, according to Federal Reserve Bank data. In August, the index had crept back up to 96.8, slightly below the 20-year high of 100.7 in December 2007, the month the US economy went into recession.
Manufacturing production that returned to the US, plus new manufacturing investments in the US, is expected to help boost the index further. The added US manufacturing production includes 100 offshored jobs padlock manufacturer Master Lock brought back to Milwaukee since 2010; a South Carolina plant Otis Elevator is investing in to bring back offshored jobs from Mexico and other locations; and about 12,000 jobs automaker Ford plans to bring back to the US from China, Japan and Mexico by 2017.
Some companies re-shore production or invest in new US plants to locate manufacturing close to research and development facilities, according to the PwC analysis. But most of the re-shoring activity is driven by structural changes, such as:
Transportation costs that have increased considerably, because worldwide rising demand for energy has pushed up the price for crude oil, diesel and jet fuel. As a result, some US machinery companies already started producing more domestically for sale to the North American market.
Technical advances that allow extraction of shale gas in the US. Also known as shale gas fracking, the extraction technique promises to create about 1 million jobs and reduce natural gas expenses by up to $11.6 billion annually through 2025.
The rising value of the Chinese currency. A cheaper US dollar helps boost US exports, a currency trend that is likely to continue as China’s economy grows.
The size of the US market, which continues to attract foreign manufacturers to build plants in the US that fill US demand.
As manufacturing jobs return to the US, demand for US-made goods is projected to increase overseas, especially among the growing middle class in emerging countries.
Boston Consulting Group research suggested that by 2025 lower labour and energy costs will leave the US with 5% to 25% lower export costs than Germany, Italy, France, the UK or Japan. As a result, the US could capture shares of European and Japanese exports worth about $90 billion annually.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.