Made in America - Focus on Value, the Wallet will Follow

 China’s overwhelming manufacturing cost advantage over the US is shrinking fast. Within five years, a Boston Consulting Group Analysis  concludes, rising  Chinese wages, higher US productivity, a weaker dollar, and other factors will virtually close the cost gap between the US and China for many goods consumed in North America.

There is a perfect case for manufacturing coming back to US in full swing in the coming years, if the trend is anything to understand.  The sign post is clear and quiet obvious.

There are factors within and outside the US which will influence the way manufacturing trajectory will move 

External Factors:

•  Rising labor and other costs overseas,
•  The desire to reduce supply chain uncertainty
• Increased transportation costs
• Volatile fuel costs
• A little over 10% of all jobs created in the economy over the past two years            came  from the manufacturing sector 
• Labor costs in China have risen by some 22% in 2013 alone, with a further doubling of wages expected over the next five years.
• This has eroded China’s competitiveness, as it loses manufacturing business to its neighbors and economic competitors worldwide

Domestic Factors:

• The amount of output per hour worked in the U.S. has steadily grown in recent years, with a 0.5% increase in 2011 and a 1.5% increase in 2012.
• The rise of new domestic sources of shale oil in the U.S. has raised the distinct possibility of energy independence for the country within a few decades, maybe less.
• The development of alternative energy sources such as solar power points to a cheaper energy environment for the United States
• The U.S., meanwhile, is becoming a lower-cost country. Wages have declined or are rising only moderately. The workforce is becoming increasingly flexible.
• The dollar is weakening.
• Productivity growth continues

This must be a wakeup call for country like India, since the wage inflation will come and haunt like China as the economy moves into growth phase.  The Indian manufacturers have already started losing few of outsourcing deals and there are instances where German producers are cost competitive than Indian manufacturers.  

The aftermath of global meltdown has created positive impact for the developed economies since the competitiveness gap is getting bridged on account of converging wage pattern given the steep rise of wage inflation in China. That’s bringing manufacturing back to reckoning in US.  

Indian manufacturing, especially SME’s will be challenged by other smaller economies through competitive pricing and the key differentiator will be value creation. There is going to be no free lunch in the future and business has to be earned through competitive advantage based on productivity, value excellence and innovation.

The gap between Chinese wage cost and other developing economies is still wide and the rate of increase is also divergent, countries like India, Vietnam and Indonesia can crab the share if they can respond to the changing dynamics. 

Made in America may taste bitter, but can become sweet if the recipes are right……

Marggo India

T Margabandhu