Manufacturers Love U.S., Mexico

We’ve been hearing this for the past three years:multinationals are moving to the U.S. to manufacture goods of all kinds. China’s days as the globe’s low cost producer are over. Hurrah for labor.

Not so fast.

One reason why manufacturing is returning to the U.S. is stagnant wages. Other reasons are because of logistics, location to other markets the manufacturer is targeting, and high productivity due to automation.

Still, the good news is that manufacturing is returning to the U.S. In fact, the new global hot spots for widget making assembly lines are right here in North America, led by us and our Mexican neighbors.

A new report by the Boston Consulting Group called the U.S. and Mexico the “rising global stars” of worldwide manufacturing.

Manufacturing cost competitiveness for both the U.S. and Mexico improved substantially between 2004 and 2014 compared with 25 major world exporters, BCG said in its report, released on Tuesday.  Productivity-adjusted wages and currency rates have remained stable or improved relative to the other countries, making the U.S. and Mexico prime real estate for new assembly plants.  Both nations also have very competitive energy costs thanks to new oil and gas discoveries in the U.S.

Caterpillar is just one of many multinational manufacturers shifting production to the U.S. and Mexico. Here, President Barack Obama reminds workers that manufacturing is what created the American middle class.

Over the last three years, heavy machinery manufacturer Caterpillar has shifted production of construction equipment from Japan to the U.S., creating hundreds of jobs at a time when the narrative was that American manufacturing was dead and gone.

The manufacturing-cost gap between the U.S. and other developed countries widened significantly between 2004 and 2014. Average U.S. costs are now estimated to be 9 percentage points lower than the UK, 11 points lower than Japan, 21 points lower than Germany, and 24 points lower than France.

The U.S. has emerged as the lowest-cost manufacturing location of the developed world, roughly on par with South Korea.

According to the study, the U.S. is even approached cost-parity with some nations of Eastern Europe.  Our cost gap with China “has shrunk dramatically” and, BCG researchers said, “if the trend of the last ten years continues, will disappear before the end of the decade.”

Labor is one key to the growing U.S. competitive advantage. The U.S. has one of the developed world’s most flexible labor markets, ranking as the most favorable economy in terms of labor regulation among the top 25 manufacturing exporters. The U.S. also has by far the highest worker productivity among the world’s 25 biggest manufactured-goods exporters. Adjusted for productivity, U.S. labor costs are an estimated 20% to 54% lower than those of Western Europe and Japan for many products.

The report also stated that energy savings was propelling U.S. manufacturing too.

Prices for natural gas have risen around the world, but have fallen in the U.S. by around 50% since 2005, when large-scale recovery from underground shale deposits began in earnest.

Natural gas currently costs three times more in China, France, and Germany and four times more in energy strapped Japan.

The energy component will be a hard one for competitors to tackle in the years ahead, BCG researchers said.

For Mexico, Latin America’s second largest economy has regained its status as a leading low-cost manufacturer, replacing China on many product lines.

Mexico has been a low cost U.S. producer since the 1994 signing of the North American Free Trade Agreement, but it could not match China on labor.  Even with costly shipping across the Pacific Ocean, China was a cheaper place to produce. And one China joined the World Trade Organization in 2001, Mexico went out of favor.

Mexico is now back.

In 2000, Mexican manufacturing labor was roughly twice as expensive as China’s. Since 2004, Chinese wages have risen four fold. Mexican wages also rose, but by much less in pesos and even less in dollar terms while the Chinese yuan has gotten stronger over the same period.

The report said that even though China has had higher productivity growth, the average Mexican productivity-adjusted labor costs are now estimated to be 13% lower China’s. Add attractive electricity and natural-gas costs, and Mexico’s total costs are estimated to be 5% below those of China, 9% below those of the U.S., and 25% below those of Brazil, Latin America’s largest economy.

The report was designed with executives of export manufacturing firms in mind.

“Many companies are beginning to see the world in a new light,” said Harold L. Sirkin, a BCG senior partner and co-author of the report. “They are finding that many old perceptions of low-cost and high-cost countries are out of date, and they are starting to realign their global sourcing and production networks accordingly.”