Is North America's Manufacturing Industry Doomed in the Global Economy - Literature review Example

Is North Americas Manufacturing Industry Doomed in the Global Economy? In early 1950s, the US contributed to the tune of almost 40 percent of the worlds manufactured goods. Since then its share of manufactured goods in world market kept on declining due to resurgence in Europe and thereafter in Japan due to its quality and cost-effective production strategies, especially in the field of automobile and electronic goods. In 1990s, East Asian Tigers, South Korea and Taiwan made major inroads by creating production bases in the goods such as shoes, apparel, toys and consumer electronics industry. In 1990s, China also made a big leap in creating production bases in variety of goods due to favorable low-cost labor availability (Sirkin et al., 2011). It is true that the North American manufacturing sector may not reach to its old glory but at the same time, the North American manufacturing is not going to doom either. In fact, there is significant possibility of resurgence in North American manufacturing industry in the years to come. The paper aims at exploring the reasons for the revival of the North American Manufacturing. It is true that in a free market, the laws of economics prevail. Manufacturers tend to establish bases where production cost is likely to be lowest. If the US manufacturing sector is affected due to its higher labor cost then the situation may reverse if the labor costs at other producing centers also rise and that is what has begun occurring. Sirkin et al (2011) argue, "China’s overwhelming manufacturing cost advantage over the U.S. is shrinking fast" (2). With the advent of globalization, the world economy is also evolving rapidly. Wages in the countries such as China are on rise due to rising per capita income levels. According to the authors from the Boston Consulting Group, rising Chinese wages, a weaker dollar, higher US productivity will reduce the cost difference between these two countries considerably in coming years. After all what is important is the total landed costs to the US consumers and not simply a wage rate in China. The following reasons are given for the shift in production centers back to the US in next few years. a. Chinese wages are rising at the rate of 15 to 20 percent per year and the cost advantage will reduced to 39 percent in 2015 from 55 percent noted in 2010 after adjusting to the higher productivity levels of US workers. The cost advantage for outsourcing manufacturing activities to China is likely to drop to less than 10 percent in many consumer products. b. Low-cost labor of China is beneficial in those product lines where manual handling is higher but not much beneficial in the products where automation is not only desirable but necessary due to quality requirements. More automation using robots in the years to come for several industrial operations will squeeze the cost advantage that prevails in China. c. Chinas own domestic consumption is increasing rapidly due to increase in disposable income and therefore, less and less spare capacity will be available in China to cater to the other markets such as North American market. This will also necessitate many US head-quartered transnational companies to expand further not in China but in the North American markets to cater them. d. In the last few years, the US has become energy secured due to recent shell-gas discovery and advancement in drilling technologies. Not only that but also the US has become the most cost effective in energy sector across the world. Energy being a major input in most manufacturing industries the advantage goes home. According to Sirkin (2011), the current manufacturing output in the US is higher by 250 percent when compared with its 1972 level on constant dollar basis; however, employment has dropped by 33 percent. Between 1997 and 2008, the US manufacturing output has increased by 33 percent to $1.65 trillion. In 2010, China, in terms of value, accounted for 19.8 percent of global manufacturing while the US share stood at 19.4 percent. Thus, manufacturing share of the US in the world economy is still significant when seen in global perspective. Sirkin et al. (2011) argue that rising wages, shipping costs, high land costs and stronger Yuan are fast taking away advantage of Chinese manufacturing sector. Contrary to this, wages in the US are either stagnant or declining. The dollar is losing strength against Yuan and the workforce becoming more flexible and productive. Sirkin et al. (2011) are of the view that by 2015, the cost of several products in the US will be only marginally higher – by about 10-15 percent than the cost of manufacturing in China. Inventory costs, shipping costs, and supply chain issues when taken into account the cost advantage in China will get largely nullified. Several evidences are available that establishes continuing shift in manufacturing bases back to the North America; some of them can be described as per the following (Sirkin, et al. 2011). 1. Sleek Audio has shifted its production base for high-end headphones from China to its plant at Florida. 2. Ford Motors has made agreement with the United Auto Workers that will create 2000 new jobs in the US at modest rate of $14 per hour. 3. Due to rising shipping and manufacturing cost, the Coleman Company has decided to move its 16-quart wheeled cooler from China to Kansas. 4. NCR shifted its production capacities to manufacture ATMs at Columbus, Georgia from offshore site. 5. Outdoor Greatroom Company shifted its production location from China to the US due to supply chain issue. It is true that the cost impact will vary industry to industry; however, shifting production bases back to the US are more advantageous where labor cost component is smaller compared to its overall cost. For example, construction equipment, auto parts manufacturing can shift back to the North America due to automation involved and huge domestic market. According to Morgan Stanley, the “draining away of manufacturing capacity to China" and to other emerging economies has stopped (Aeppel, 2013). Reasons are increased shipping cost, and the cost of maintaining large inventories. Serving North American Market from the far east production centers make suply chain more cumbersome. Instead, companies would prefer to open new production capacities in Mexico so that North American market can be served more effectively. This implies that North American manufacturing sector is likely to revive rather than getting doomed. "Outsourcing is quickly becoming outdated as a business model" (Fishman, 2012). According to the CEO of General Electric, Jeffrey Immelt, GE has begun shifting much of its appliance-manufacturing lines back at Louisville after a long time. GE recently shifted manufacturing of low-energy water heaters from a Chinese contract factory. GE also began manufacturing new high-tech French-door refrigerator at the same site and dishwasher manufacturing unit will commence soon. That means GE has begun discarding manufacturing outsourcing significantly. North American manufacturing is reviving because the US energy cost has reduced. Also, depreciating dollar is making imports costlier. International shipping cost is quite volatile and to ship goods from far off places such as China has increasingly become costlier. Lower energy cost is a long-term phenomenon in North America because of abundant availability of shale gas. Currently, the US is not only energy secured but efficient too because energy is available at one-fourth of the cost in comparison to the costs that prevail in Asia and Europe. After financial crisis, the US labor cost has decreased relatively as the labor costs in Asian countries show upward trend. (Celasun et al., 2014). Decline in North American manufacturing sector in past years needs to be seen in line with what happened in other developed countries of the world. It is important to note that similar trend was also seen in most of the Organization of Economic Co-operation and Development (OECD) member countries such as the UK, Japan, Belgium, France, Sweden. To be more specific, between 1990 and 2003, the jobs in manufacturing sector in the UK declined by 29%, in Japan by 24%, in France by 14%, in Belgium and Sweden by 20%. It is important to note that between 1990 and 2003manufacturing sector in Canada did register increase in jobs (Statistics Canada, 2010). That is to say share of manufacturing sector in GDP across most developed nations is on decline giving way to the service sector economy (Bernard, 2010); however, the trend has been changing since then. Of late, due to recession and changed scenario in North American manufacturing industries, workers’ union has become soft and accepting lower wages (Sirkin, et al. 2011). This will also help restoring some of the manufacturing back to the North America. Thus, there are ample evidences and reasons to assume that the North American Manufacturing will not only revive but grow in the years ahead – at least in the sectors where labor component of the total cost is not significant. It is certain that the North American manufacturing industry will not doom in the coming years as anticipated by many; contrary to this, resurgence in the North American manufacturing is now possible. References Aeppel, T. (2013). The Myth of the Manufacturing Renaissance. wsj.com. Retrieved July 15, 2014 from http://blogs.wsj.com/economics/2013/04/30/the-myth-of-the-manufacturing-renaissance/ Bernard, A. (2010). Trends in Manufacturing Employment. Retrieved July 13, 2014 from http://www.statcan.gc.ca/pub/75-001-x/2009102/article/10788-eng.htm#data Celasun, O., Bella, G. D., Mahedy, T., and Papageorgiou, C. (2014). The US Manufacturing Recovery: Uptick or Renaissance? imf.org. Retrieved July 15, 2014 from https://www.imf.org/external/pubs/ft/wp/2014/wp1428.pdf Fishman, C. (2012). The Insourcing Boom. Retrieved July 16, 2014 from http://www.theatlantic.com/magazine/archive/2012/12/the-insourcing-boom/309166/ Sirkin, H. L., Zinser, M. and Hohner, D. (2011). Made In America, Again: Why Manufacturing will return to the US. The Boston Consulting Group. Retrieved July 13, 2014 from http://www.bcgindia.com/documents/file84471.pdf Statistics Canada (2010). After increasing in the late 1990s, manufacturing employment stagnated and then declined. Retrieved July 13, 2014 from http://www.statcan.gc.ca/pub/75-001-x/2009102/charts-graphiques/10788/c-g000a-eng.htm Read More