Rising costs in China drive manufacturing back to the United States

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GUANGZHOU, CHINA (June 18, 1:15 p.m. ET) — As major multinational firms increasingly move work out of China to get away from that country’s rapidly rising costs, some voices are predicting a mini-renaissance for manufacturers in mature markets like the United States.

While there are signs U.S. manufacturing is benefiting, executives from some multinationals and the plastics supply chain suggest a more nuanced picture is emerging of which places, if any, could become the next go-to manufacturing hot spots.

One bottom line is that labor-intensive industries are leaving China as factory wages rise 15 percent a year and its currency strengthens. At the same time, firms making higher-technology goods like computer servers feel much less pressure and see many advantages to China.

Athletic goods manufacturer Adidas AG of Herzogenaurach, Germany, is one that is sharply reducing China sourcing.

Four years ago, it sourced about 45 percent of its products from China. Today that figure is closer to 38 percent and by 2015, it will be between 25 and 30 percent depending on the product, said Bill Foudy, the Hong Kong-based head of strategy and brand sourcing, global operations, for Adidas Sourcing Ltd.

“We’ll build less for exports as costs rise,” he said, noting that Chinese manufacturing will switch to put more emphasis on meeting domestic demand.

On the other side are more technology-oriented companies like the OEM business of American computer manufacturer Dell Inc. of Round Rock, Texas.

The rising costs are a concern for Dell, but the company also is building a large new manufacturing plant in the western China city of Chengdu to help it better tap the domestic market, said Glen Burrows, Hong Kong-based Asia Pacific and Japan vice president for Dell’s OEM Solutions Group. Burrows’ firm makes specialized computer hardware that goes inside the products of other companies.

“Certainly in value-added technology, we don’t see anyone moving out of China per se because we’re not in the low-cost end of manufacturing,” said Burrows.

China is Dell’s second-biggest market globally, after the United States, he said. The company employs more than 6,000 people in China, with a large factory campus in Xiamen.

‘Reshoring’ to US

An April study from Boston Consulting Group in the United States found that China’s rising costs could, by the end of the decade, bring back 10-30 percent of the goods that the U.S. now imports from China in seven categories, including plastics and rubber products.

The study predicts that the trend toward reshoring — plus the increased competitiveness of U.S. manufacturing in general compared with other major developed economies — will together be responsible for creating 2 million to 3 million jobs in manufacturing and support industries in the United States.

That’s less than the 6 million jobs lost in manufacturing between 2001 and 2009, when exports from China tripled, but some see China’s rising costs as a good chance for U.S. firms.

“It’s a huge opportunity to recoup our manufacturing prowess, if we do it right,” said Jon Huntsman Jr., former U.S. ambassador to China and presidential candidate, in an April keynote speech at the NPE2012 plastics trade show in Orlando, Fla.

He also sits on the board of his family’s chemical and plastics company, Huntsman Corp., and on the board of Ford Motor Co.

There is a trend among plastics injection molding companies to look seriously at alternatives to China, although the trend is in its very early stages, according to executives with China’s largest injection press maker, Haitian International Holdings Ltd., in interviews at NPE.

Ningbo, China-based Haitian wants to be ready and is preparing for that additional demand in the United States and elsewhere in the Americas, said Executive Director Helmar Franz. Haitian’s subsidiary in the United States, Absolute Haitian Corp., is based in Worcester, Mass..

“I would say it will be a significant issue,” he said. “It is not yet, but the signs are going up and we [are preparing] for this. … We need to go along those lines to strengthen our foreign organization in these countries to prepare them to take all this demand when it comes, otherwise the local players will take it.”

But manufacturing leaving China may not automatically head for the United States, even if American consumers are its final target, Franz suggested.

“The first way out of China, as we observe, is not the United States,” he said. “The first way out is Mexico, to try to take advantage of the cost advantages there.”

Injection molding companies in Asia also are seeing their customer base of multinationals shift work from China to other spots in the region.

Nagatsu Precision Mold Co. Ltd. is a Kawasaki, Japan-based injection molder and mold maker of complex parts for Japanese camera and electronics makers such as Canon, Nikon, Panasonic and Sony. It also has sizable molding factories in China.

“Some of our clients are trying to shift the locations of their manufacturing, to the Philippines, Thailand and Vietnam,” Shiro Tanaka, Nagatsu senior manager of sales engineering, said during the NPE show.

“It’s in a transition phase,” he said. “The clients are trying to find the best place to move to. We are studying it also.”

He believes it is unlikely much of the manufacturing would return to Japan, though, because costs there remain too high. And he said Nagatsu’s customers still want to maintain strong China manufacturing to sell into the local market.

Clearly there’s a lot of studying of alternatives going on. A current email advertisement circulating in China aimed at French manufacturing companies is promoting a trade mission to Myanmar to look at a range of factories there, including plastics.

The next China

But judging from what Dell, Adidas and others say, it will be very difficult for another country to match China’s combination of a large workforce, skilled and relatively low-cost engineers, supply chain and physical infrastructure, at least short-term.

“We haven’t seen that replicated anywhere else,” said Adidas’ Foudy. “India was supposed to be the next big answer, but anyone that’s been there understands there are challenges.” For example, infrastructure is one big issue in India, he noted.

Both he and Burrows from Dell spoke at a May 18 conference in Hong Kong sponsored by the American Chamber of Commerce in Hong Kong.

“Everyone talks about finding the next China. We can safely say there really is no next China,” Foudy said, “in terms of all that’s offered: a large workforce, relatively efficient factories in terms of large output … cost competitiveness, supply chain, material supply, infrastructure and government support.”

Still, he said Adidas is diversifying its sourcing to other markets like Southeast Asia, Eastern Europe or Brazil. The firm has its eye on Brazil in part because of demand from the upcoming 2014 World Cup and 2016 Olympics, and partly because of import duties Brazil puts on Chinese-made goods, he said.

Burrows said he sees companies shifting investment dollars away from China to regionally focused manufacturing, whether that’s in emerging Asian economies like Indonesia, or in Eastern Europe or Latin America.

Oil prices are significantly adding to the cost of long-distance Asian sourcing, and companies see regional factories as giving better access to consumers in newer markets, he said. In the case of Asia, regional factories also can leverage China’s strong engineering base, Burrows said.

While it may be the end of “cheap China,” a major strength for the country — and a reason for continued investment, even as costs rise — will be its rapidly growing domestic market, said Andrew Sheng, president of Fung Global Institute in Hong Kong. He spoke at the AmCham conference.

China’s switch from a cheap-labor, cheap-capital model is following the same logic as pioneering American carmaker Henry Ford, who felt that “if I pay my workers better, they buy my goods,” Sheng said.

Burrows said he believes the scope of foreign direct investments in China will be harder for another country to duplicate in the next decade because of reduced FDI after the 2008 financial crisis.

“Does the world have the outbound FDI flows in the next 10-15 years to match the inbound flows that have gone into China for the last 15 years?” he said. “In the current macro environment, I don’t think that’s true.”

China’s existing infrastructure is a big advantage, he said.

“The infrastructure that’s been developed over the last 20 years of investment has created an export manufacturing engine that will be sustainable over a long time,” Burrows said. “That seems to be the view we have and the view many of our top customers have.”

For companies like Dell, China’s draw is not about low-cost labor.

“The absolute amount of labor that goes into manufacturing a computer or a notebook is relatively small compared to the cost of a finished item, therefore labor arbitrage is less of a driver for us as opposed to other industries,” Burrows said. “I think it’s very important that we maintain absolutely high quality and that we have stability of supply.”

Dell can get those things in its China factory and with its supply chain there, including its plastics parts suppliers, he said. “China is best of breed for Dell global manufacturing in quality. We don’t have a China quality challenge at all.”