A big consulting firm is predicting a renaissance in manufacturing jobs here in the U.S. in the next five years, because wages in China are growing so fast. The economics of global business suggest that the gains would be limited to complex products, but of course any resurgence in jobs would be welcome. But the authors of the report says that the employers won't be making the moves solely on a reduced gap in wages -- they'll be looking for "incentives" as well, from taxpayers.
This comes at a time when U.S. corporate profits are higher than they have even been, and they have record amounts of free cash on their balance sheets. When all governments are trying to get their budgets in line and shore up our country's finances, should big business really be looking for handouts?
The people at Boston Consulting Group, who have great insights, have been watching wages in China grow at between 15 percent and 20 percent per year, and expect more of the same due to a shortage of crucial skills. By 2015, says Harold Sirkin, a senior partner of the firm, the difference in net labor costs between China and the U.S. will shrink, so that Chinese wages will only be about 30 percent lower. Given American workers are much more productive, the costs equal out. The weak dollar enters the cost equation as well.
BCG adds, however, that the production most likely to move is stuff that is not labor intensive, such as household appliances and construction equipment. Manufacturing of textiles, clothing and electronics are likely to stay in cheaper-wage countries.
The shift has already begun. Michigan has made gains in manufacturing, and Caterpillar is building three factories in the U.S., reports the Peoria Journal Star, the company's hometown paper:
The Victoria [Texas] plant is the third plant announcement by Caterpillar within three weeks. A new plant will be built in Winston-Salem, N.C., to produce axle units for mining equipment and another plant in North Carolina will be expanded to produce more compact skid steer machines.
Those projects will create more than 800 jobs, the company said.BCG also points out that NCR Corporation is bringing manufacturing of ATMs to the US, to be closer to the customers. Wham-O has brought home 50 percent of its production of Frisbees and Hula Hoops. Here's coverage from Plastics News.
There are two rich ironies here. While the rise in wages means American workers won't have to compete with Chinese workers on price, they will still have to deal with lower wages in places such as Thailand, Indonesia and Vietnam.
Second is that companies are expecting incentives to make the moves. While BCG doesn't specify what those are, typically there are tax breaks for several years.
"Workers and unions are more willing to accept concessions to bring jobs back to the U.S.," noted Michael Zinser, a BCG partner who leads the firm's manufacturing work in the Americas. "Support from state and local governments can tip the balance."Like I said, corporate profits are at all-time highs, and so is the cash sitting on corporate balance sheets -- something like a trillion dollars these days. These companies need support to bring business back to their home country?
Separately, legislators have proposed that U.S. corporations be able to bring home a trillion in profits earned overseas, and pay just 5 percent income tax, rather than the standard 35 percent. From the Financial Times:
The plan has the support of top House Republicans - particularly Eric Cantor, the majority leader - but is likely to struggle to make it through the Senate, where many Democrats are worried it would encourage the shifting of plants and operations overseas.
In addition, there are concerns in the wake of the move that the money brought back was not used to make new investments in the US but to reward shareholders through share buy-backs and dividend payments. Critics said this is what occurred the last time such a tax holiday was enacted in 2004.Let's not get fooled on that again.
Caterpillar received $1.2 million to build the plant in Texas. OK, if it takes just small amounts such as that to close these deals, that's probably money well spent. But a company called GlobalFoundry is getting $1.3 billion from New York over 15 years, to create thousands of jobs. If there is an opportunity for U.S. businesses to bring production home, let's hope corporations will remember where their largest markets are, and not expect handouts.