Friday, December 7, 2012

The Industrial Renaissance in the United States

One of the reasons I remain resolutely (yet moderately) bullish on the outlook for stocks in the coming years is the industrial renaissance occurring in the United States.

It was only a few years ago that commentators were condemning the U.S. worker to low-paying jobs in the service sector.  Asia - and in particular China - was going to be the place where manufacturing flourished to their low wages and apparently endless supply of skilled workers.

America, it seemed, was doomed to be a nation of "hamburger flippers".

Yet now it appears that many U.S. companies are finding their experiences in China less satisfactory than originally projected.

The Atlantic magazine had an excellent article discussing the trend of "insourcing" manufacturing that is becoming more widespread among U.S. business.

The article talks about how General Electric is now moving the production of some of its household appliances back to facilities in Kentucky.   GE CEO Jeff Immelt is quoted as saying that he's not making these moves because he's "running a charity" but because "I think we can make money".

The Atlantic article highlights some of the reasons that the love affair with Chinese manufacturing has lessened:

Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.
  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
  • In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
  • American unions are changing their priorities. {GE's} Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
  • U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

Apple CEO Tim Cook also revealed in a recent interview with Bloomberg that it was moving some of its manufacturing back to the U.S.  Apple, of course, makes most of its products in China, but now will be increasing its presence in the U.S.:

... And next year we are going to bring some production to the U.S. on the Mac. We’ve been working on this for a long time, and we were getting closer to it. It will happen in 2013. We’re really proud of it. We could have quickly maybe done just assembly, but it’s broader because we wanted to do something more substantial. So we’ll literally invest over $100 million. This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.

Apple's Steve Jobs famously told President Obama at a meeting a few years ago that the Apple jobs that had been outsourced from the U.S. to China were "gone - and they're not coming back."

But now perhaps the tide is turning.