Made – and Rebalanced – in America

The Future of American Power
March 5 2012 7:17 AM

  Made – and Rebalanced – in America

Financial analysis of manufacturing

Even as GOP operatives stoke war fears with Iran and drive oil prices skyward – about the only way to derail a recovery that will seal a second term for Barack Obama, after all – the deeper structural changes necessary to correct the global imbalances that created the Great Recession have began to show results.

 

While recent economic headlines have featured Europe’s debt drama, the subtle interplay between the US and China represents a far more reliable indicator of whether the distortions and misplaced incentives that nearly destroyed capitalism four years ago are being corrected. One very important piece of evidence is the revived fortunes of America’s manufacturing sector.

 

“Rebalancing,” in global economic terms, is the process of prodding export surplus nations like China to emphasize the development of their own domestic markets over export industries, while encouraging profligate importers like the US abroad to stop living off loans fueled by their own addition to cheap consumer goods. The simple logic, from a US manufacturing perspective, is that higher living standards and expectations in China put America’s factories back in the game.

 

Neither transformation is simple – but the good news here is that the long, slow and often anemic recovery that followed the collapse of 2009 is just the right medicine, forcing deleveraging in the US (and Europe) just as it has forced China to invest funds in its own people. If the US can create a template for debt reduction and China avoid overheating its economy, the rebalancing will benefit everyone.

 

Since the economy began its tailspin in 2007, manufacturing as a sector has greatly outperformed the rest of the economy. It took the hit like every other sector in 2008-2009, of course, but the bounce back is impossible to deny.

 

A a number of factors have converged to fuel an export boom for major manufacturers like General Electric, Procter & Gamble, Hewlett-Packard, and others. Recent economic data and changing global trends in labor, energy, and other markets support the idea that this could be the start of a longer term trend.

 

In 2011, the Boston Consulting Group (BCG) reported that, due to a number of changing economic realities—including rising salaries and economic expectations among Chinese workers, new labor, environmental and safety regulations abroad, the higher cost of energy required to ship products halfway around the world, and the US market and the uncertainties of political risk in these places—the cost benefits of producing in Asia no longer automatically outweigh the risks. Indeed, the BCG report predicts a “renaissance for U.S. manufacturing” as labor costs in the United States and China converge around 2015.

 

“Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs,” says BCG’s Harold L. Sirkin, an author of the report. “They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother—and that’s before taking into account the added expense, time, and complexity of logistics.”

 

Anecdotally, the effects can be seen in new plants created in the United States and in some instances in which plants set up abroad a generation ago to leverage lower labor costs have relocated back to America—dubbed “back- shoring” or “reshoring” in market parlance.

 

GE, two years after announcing it would move production of energy-efficient refrigerators abroad, reversed itself in January 2011 and decided on a $93 million upgrade to its plant in Bloomington, Indiana, saving over seven hundred jobs. The company did the same thing earlier in Louisville, Kentucky, investing $80 million in modernizations for a water heater facility rather than moving its four hundred jobs overseas.

 

GE competitor Whirlpool, another big appliance manufacturer, already has several factories in Mexico, and its South Korean rivals make some of their cooking products there. But after months of study, Whirlpool decided in mid-2010 to spend $120 million on a new plant in Cleveland, with a net gain of one hundred and fifty jobs once it’s up and running. Although labor costs would be lower in Mexico, Whirlpool found lots of reasons to stay in the Cleveland area. It already had a trained workforce there and wouldn’t need to pay severance costs. Freight costs would be lower since most of the plant’s products are sold in the United States.

 

This trend goes beyond “consumer durables,” too.

·   Caterpillar is building a $120 million plant to make giant earthmovers in Victoria, Texas, including some models that were previously built in Japan and shipped back to North American customers. The Japan plant is now free to devote more capacity to the booming Asian market.

·   Dow Chemical, the cash register company NCR, Sauder Woodworking, lock maker Master Lock, and the machine tool firm GF AgieCharmilles have all brought overseas production back to the US market in the past three years.

 

If the main factors in these decisions were labor costs and the weak dollar, the victories would be Pyrrhic. “Inputs”—energy, transportation, raw materials, and other production costs—will fluctuate. But, as Holstein and others have argued, the decisive advantages include innovative management and production techniques, savings on transportation costs, lower political risk and corruption, and the productivity and relatively high skill levels of the American workforce. An added benefit is the effect that China’s gargantuan manufacturing sector is having on other world currencies.

 

As China buys coal, oil, wood, minerals, and other resources, the commodities boom inflates the currencies of countries that also compete with US products, including Canada, Australia, South Africa, Brazil, and Russia.

 

Is this a solution to all problems: no, of course not. But it does provide a hint of where the US should be spending its increasingly precious dollars: R&D, high-end technical educations and, as always, supporting advanced degrees in the disciplines that fuel innovation.   

 

Michael Moran is Director and Editor-in-Chief of Renaissance Insights, at Renaissance Capital, the emerging markets investment bank. Follow him on Twitter, subscribe to his Facebook feed, or preorder his book, "The Reckoning: Debt, Democracy and the Future of American Power," coming in April from Palgrave Macmillan.

Michael Moran is an author and geopolitical analyst.

TODAY IN SLATE

Politics

Talking White

Black people’s disdain for “proper English” and academic achievement is a myth.

Hong Kong’s Protesters Are Ridiculously Polite. That’s What Scares Beijing So Much.

The One Fact About Ebola That Should Calm You: It Spreads Slowly

Natasha Lyonne Is Coming to the Live Culture Gabfest. Are You?

A Jaw-Dropping Political Ad Aimed at Young Women, Apparently

The XX Factor
Oct. 1 2014 4:05 PM Today in GOP Outreach to Women: You Broads Like Wedding Dresses, Right?
Crime

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.

Music

How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

Tattoo Parlors Have Become a Great Investment

This Gargantuan Wind Farm in Wyoming Would Be the Hoover Dam of the 21st Century

Moneybox
Oct. 1 2014 8:34 AM This Gargantuan Wind Farm in Wyoming Would Be the Hoover Dam of the 21st Century To undertake a massively ambitious energy project, you don’t need the government anymore.
Behold
Oct. 1 2014 6:59 PM EU’s Next Digital Honcho Says Celebs Who Keep Nude Photos in the Cloud Are “Stupid”
  News & Politics
Politics
Oct. 2 2014 11:01 AM It Wasn’t a Secret A 2013 inspector general report detailed all of the Secret Service’s problems. Nobody cared.
  Business
Moneybox
Oct. 2 2014 9:19 AM Alibaba’s Founder on Why His Company Is Killing It in China
  Life
Atlas Obscura
Oct. 2 2014 10:42 AM The Hanging Coffins of Sagada
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
  Arts
Brow Beat
Oct. 2 2014 10:36 AM How Bad Will Adam Sandler’s Netflix Movies Be?
  Technology
Future Tense
Oct. 2 2014 11:01 AM Surge Pricing Is Not Price Gouging
  Health & Science
Medical Examiner
Oct. 2 2014 9:49 AM In Medicine We Trust Should we worry that so many of the doctors treating Ebola in Africa are missionaries?
  Sports
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?