With its 1.5 million factory workers earning as little as $300 a month to make iPhones, laptops and PlayStations, the Chinese behemoth Foxconn has become a potent symbol of America’s manufacturing decline and the transfer of jobs to Asia.
Which is why so many are taking Foxconn’s recent announcement that it would invest $30 million to hire 500 workers for a new robotics factory in Harrisburg, Pa., starting in 2014—and possibly a second factory in Arizona—as proof of a stunning reversal of fortune for American manufacturing, an industry long ago written off as a casualty of globalization.
From 2000 to 2009, America bled nearly six million manufacturing jobs, or a third of its industrial workforce, as companies shifted production overseas. But over the past two years, the country has seen the green shoots of manufacturing’s rebirth. Since 2011, the U.S. has added 550,000 new manufacturing jobs, according to the Bureau of Labor Statistics, marking the first positive news for the sector since 1997. The renaissance isn’t concentrated in any one industry or region. In the past year, companies as diverse as General Electric, Dow Chemical and Apple have opened or announced plans for new production facilities in places ranging from Pennsylvania to California. Google, which purchased Motorola’s handset division, is making its Moto X smartphone in a shuttered Nokia factory in Forth Worth, Texas. China’s Lenovo, the world’s second-largest PC manufacturer, plans to make ThinkPad laptops in North Carolina, while last month, Apple said it will build a factory in Mesa, Ariz.
Foxconn says its plans are largely driven by the fact that its customers, American tech darlings such as Apple and Hewlett-Packard, are under intense public pressure to reshore production in the aftermath of the financial crisis. “We are looking at doing more manufacturing in the U.S. because, in general, customers want more to be done there,” company spokesman Louis Woo told Bloomberg.
Wal-Mart has similarly jumped on the made-in-America bandwagon. Earlier this year, the company pledged to spend $50 billion over the next decade to source more domestic products, which it will sell under the banner Made Here. “Labour costs in Asia are rising. Oil and transportation costs are high and increasingly uncertain,” Wal-Mart U.S. CEO Bill Simon told a manufacturing conference in August. “The equation is changing.”
Skeptics say such announcements are more about companies retooling their public relations efforts than their production lines. But beyond the good press generated from such announcements are the rapidly shifting economics of U.S. manufacturing, laid out in a series of influential reports by the Boston Consulting Group that predicted the U.S. would reach cost parity with China by 2015, and create as many as five million new jobs related to manufacturing by the end of the decade. The Manufacturers Alliance for Productivity and Innovation, an industry lobby group, forecasts the U.S. will create as many as 350,000 new manufacturing jobs next year alone, as more companies transfer production to American shores.
“What we’re seeing today is, frankly, the beginning,” says Michael Zinser, who co-authored the studies. “Companies are starting to take that long-term look even earlier than we might have thought. It’s happening quickly.”
Chinese wages are rising as much as 20 per cent a year, while U.S. wages have fallen in the aftermath of the financial crisis, he says. The shale-gas boom, which could potentially unlock more than two trillion cubic feet of natural gas, has helped drive down energy costs. Natural gas now costs roughly a quarter of what it does in China.
In a perverse twist, Zinser says America’s massive trade deficit with China is beginning to work in the country’s favour by lowering shipping costs. Freighters are arriving full of Chinese goods, but leaving empty, which has made it cheaper to get cargo space on ships heading back to Asia. Zinser says it now costs roughly as much to exports goods from the U.S. to China as it does to ship to China from Japan. “For better or worse, the U.S. actually has an advantage, when you think about sending product back overseas,” he says.
For manufacturers focused on the U.S. market, cutting out overseas shipping saves both time and money. For instance, market research firm IHS found it costs Google slightly less to manufacture the Moto X smartphone in Texas than it does for Samsung to make its popular Galaxy S4 smartphone in Korea. By using standardized parts and manufacturing at home, IHS found Google was able to get its phones into customers’ hands in as little as four days, compared to weeks for overseas manufacturers. Meanwhile, with assembly wages at the Texas plant starting at just $9 an hour, labour accounts for a mere five per cent of the total cost of making the Moto X.
Critics point out that manufacturers in low-cost southern states such as Texas have pushed wages too low in the drive to make the U.S. as cheap as China, a country with a far lower cost of living. Yet, as China’s cost advantage erodes, companies are becoming less tolerant of the headaches that come with manufacturing overseas: the late-night phone calls, expensive trips, shipping delays and long production lead times. “We’re not yet seeing lots of companies who are talking about just the economics about why they’re reshoring,” Zinser says. “It’s the quality, it’s the proximity to customers, it’s the ease of doing business in the U.S.”
Of the nearly 550,000 manufacturing jobs created in the last two years, just 50,000 were because companies shifted work from overseas, according to industry lobby group The Reshoring Initiative, which works with companies to move production back to the U.S. Many say the trend is really just a modest rebound from the dark days of the financial crisis, when 15 per cent of manufacturing jobs disappeared—the worst job loss of any single recession. “When you look at the losses in manufacturing that we had in the Great Recession, they were pretty astounding,” says Robert Atkinson, founder of the Washington think tank Information Technology and Innovation Foundation. “Now we’re getting a few back and people are like, ‘Oh my God, it’s manufacturing nirvana.’ It is largely just cyclical rebound.”
If U.S. manufacturing were undergoing a true renaissance, Atkinson says manufacturing output would be growing faster than the overall economy across a wide array of industries, and the country’s trade deficit would be shrinking because of rising exports. Instead, durable-goods shipments were up just 3.3 per cent in October compared to a year earlier, roughly equal to GDP growth. The country is running a $532.7-billion trade deficit for goods so far this year. Manufacturing exports are up just 1.5 per cent for the year, a pace that “remains frustratingly slow,” the National Association of Manufacturers’ chief economist Chad Moutray complained in a blog post in November. Atkinson says capital investment among chemical manufacturers, an industry that stands to benefit the most from the shale-gas boom, was actually lower this year than in 2007, before the financial crisis. “People want to believe in [a renaissance] so much that there’s a tendency to selectively look at the evidence to paint a more positive picture than is really there,” he says.
Still, even if evidence for a full-blown recovery is mixed, there’s a growing desire among today’s manufacturers to avoid repeating the mistakes of the past, says MIT political scientist Suzanne Berger, who has studied how manufacturers turn innovative research into a commercial product. When production leaves the country, innovation will eventually go with it, she says. That was the fate of America’s semiconductor industry, a technology developed in the U.S. but now designed and manufactured principally in Asia. “People followed each other overseas like lemmings, without really knowing what the costs would be,” she says. “There’s a lot more realism in the minds of manufacturing managers today.”
As an example of the new ways of thinking, Berger points to the National Additive Manufacturing Innovation Institute, a public-private partnership created last year with $30 million in federal funds and $50 million in private investment that brings together dozens of research institutes, training centres and thousands of large and small manufacturers in the northeast. Its goal is to explore industrial uses for 3D printing that could potentially enable manufacturers across a wide array of industries to make highly customized tools and parts for a fraction of the cost and time it takes to ship them from overseas. Foxconn’s decision to build a robotics factory in the region was due in part to the allure of such expertise.
Clusters that bring together a diversity of manufacturing industries can help strengthen the economy against future recessions, Berger says. “You would have firms that were suppliers for each other that have some overlaps, but would not all be doing the same thing. None of us are eager to repeat the one-industry towns that were really quite vulnerable to crisis.”
Such investments may take decades to pay off, if they ever do. In the meantime, even those who believe strongly that U.S. manufacturing is turning a corner understand that America’s new-found cost advantage is likely temporary. Chinese productivity is gradually catching up with the U.S. Other countries are actively looking to exploit their own natural gas reserves. Still more are researching 3D printing technology. Boston Consulting Group’s Zinser estimates the U.S. cost advantage can last another five or 10 years, a window of time that can easily be squandered without the right policies and investments. But, for the millions of unemployed workers who thought the industrial economy’s best days were behind it, the mere talk of a manufacturing renaissance is likely the greatest news they’ve had in years.