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  • Oct 23, 2014
  • Updated: 2:14pm
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China looks to the US for low-end manufacturing

Rising labour costs have led mainland suppliers to set up production facilities in America

PUBLISHED : Monday, 11 August, 2014, 3:56am
UPDATED : Tuesday, 12 August, 2014, 7:28pm

Chinese investment in the United States manufacturing sector is speeding up as the mainland's cost advantage has been eroded, given increasingly abundant energy resources from the shale oil boom in the US.

Sharp wage increases, lagging productivity growth, unfavourable currency swings and a dramatic rise in energy costs had shrunk China's cost edge over the US to 4 per cent, said the Boston Consulting Group.

"In the 1980s and 1990s, China welcomed foreign investment and positioned itself as a cheaper source of labour," said James Hsu, a partner at US law firm Squire and Sanders.

"However, profit margins in contract manufacturing are slim. Chinese companies are no longer content just being contract manufacturers.

"Due to the narrowing gap of cost of labour between the US and China, there is a quiet trend bringing back some manufacturing to the US.

"We have seen US companies requiring Chinese suppliers to set up manufacturing facilities in the US to better meet their needs."

The low cost of North American natural gas and oil from the shale boom had helped revive US manufacturing across a wide range of sectors, said Robert Dye, the chief economist of financial services firm Comerica.

"You look at total business costs, the cost of labour, capital, securing a loan, energy and everything else," Dye said. "Texas is approaching parity with China in many different ways, which is another way of saying businesses no longer have an incentive to offshore their production. They're coming back."

From 2011 to last year, annual Chinese investment in US manufacturing was less than US$400 million, but it jumped to US$2 billion so far this year, according to the Rhodium Group consultancy.

The number of jobs in the US provided by Chinese companies nearly quadrupled from 20,000 in 2010 to nearly 80,000 last year.

"The overall manufacturing cost structures of Mexico and the US have significantly improved," Boston Consulting said, adding it still ranked China as the most competitive exporter, with the US second.

Hsu said the shift had been partly led by US states offering incentives for foreign investors in their jurisdictions.

"While there have been some strong exchanges between the US and China at the national level, local governments have been more embracing of economic ties with China," he said.

For example, Virginia governor Terry McAuliffe announced in June that Shandong Tranlin Paper, a Chinese pulp and paper company, would invest US$2 billion over five years to establish its first US manufacturing operation in the state.

It is the largest Chinese investment in Virginia's history and is the largest Chinese greenfield project in the US.

As labour and other business costs increase, the era of low-end manufacturing is coming to an end in China, wrote Thilo Hanemann in a Rhodium report.

"As Chinese investment in the US continues to grow… Chinese companies will someday become significant employers in the US," Hsu said.

Hanemann was more cautious.

"The US will not see a China-driven manufacturing boom," he said. "The gap between cost in China and America is still too dramatic for a large-scale migration of productive capacity to the US.

"However, the combination of a changing economic structure and the liberalisation of outbound investment policies [by Beijing] has triggered a second generation of Chinese manufacturing investments in the US."

Correction: An earlier version of the story stated in the 10th paragraph that "the number of manufacturing jobs in the US provided by Chinese companies nearly quadrupled from 20,000 in 2010 to nearly 80,000 last year." The sentence should read "the number of jobs in the US provided by Chinese companies nearly quadrupled from 20,000 in 2010 to nearly 80,000 last year." 

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matthew.w.hall.3
They aren't moving to the U.S. for low costs, they're moving as a way to get their money out of China. The authors are surely aware of this. They can see that china's internal finances are unsustainable as well as everyone else. The U.S. is not a low-cost destination, even with lower wages and cheap energy.
 
 
 
 
 

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