U.S. and China: The End of Outsourcing?
Making it in America is looking more appealing to some firms.
After years of outsourcing and setting up factories in China, American companies have begun to reconsider the value of moving production abroad. It could be the start of a trend.
For most of the past five years, Americans’ No. 1 complaint about China has been the movement of U.S. jobs to that country. Lured by low wages, many U.S. firms have been outsourcing production to Chinese factories. Some have set up plants there to get a foothold in the Chinese market.
But the job drain from America may finally be peaking. Changing conditions are prompting some companies to rethink the economics of outsourcing to China. While some U.S. firms may move to other emerging-market countries, such as India or Vietnam, many are expected to expand their workforces in the U.S. instead.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Harald Malmgren, a former top U.S. trade official and a keen observer of developments in Asia, offers numerous reasons for the shift. Wages in China’s coastal-area workforce are rising sharply. Inflation is accelerating. Higher fuel prices are pushing up shipping costs. Quality control still is erratic. Social unrest is on the rise.
China still is a difficult place to do business, especially if you’re worried about local firms stealing your technology. And China soon will face a shrinking workforce as the consequences of the government’s one-child policy begin to show.
At the same time, the nuclear mess in Japan is giving many business executives pause about the wisdom of relying on global supply chains, particularly when they involve a single country. The damage from the tsunami and the subsequent failure of the nuclear power plants in Fukushima have disrupted the production of components for hundreds of manufacturing companies worldwide.
Meanwhile, changes in the U.S. economy have made it increasingly attractive for American corporations to keep more production at home. Wages in the U.S. have been stagnant. The recession has made American workers more flexible, and more willing to give up some costly work rules and benefits. Productivity here is rising. Manufacturing is rebounding. And the value of the dollar has declined, making outsourcing -- and paying for Chinese labor -- more expensive.
The Boston Consulting Group issued a report last week that underscores the trend. With recent economic developments in the U.S. and China, American firms are “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,” says Harold Sirkin, a BCG partner. “And that’s before taking into account the added expense, time, and complexity of logistics.”
As Sirkin suggests, U.S. executives planning new factories in China should “take a hard look at the total costs.”
Several large U.S. companies already have brought some of their production back to the United States, including Caterpillar Inc., Ford Motor Co. and NCR Corp.
This assessment of China is not universal. Nicholas R. Lardy, a China specialist at the Peterson Institute for International Economics in Washington, points out that China’s economy is growing by about 9 percent a year. Although inflation is rising sharply, it’s concentrated primarily in food prices, which are likely to level off as farmers there step up production. While wages in urban areas are soaring, they’re being offset partly by large productivity gains. And the gap between U.S. and Chinese wage levels still is large.
Lardy also dismisses the notion that China’s aging population is likely to produce a serious worker shortage any time soon. And he points out that quality control in China has improved over the past few years, particularly for exports.
Even if the outsourcing movement is reversed, no one believes U.S.-Chinese relations will be trouble-free. Washington and Beijing are at loggerheads over a spate of serious issues, from China’s aggressive efforts to reduce America’s military and political sway in Asia to continuing disputes over the treatment of U.S. businesses in China.
But conditions are right for the “Made in the U.S.A.” label to grow.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Car Prices Are Finally Coming Down
The Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
By David Payne Published
-
Rising Cyber Threat of AI: The Kiplinger Letter
The Kiplinger Letter Security experts warn that generative AI brings new risks with no clear defenses. With AI's rapid adoption, businesses are vulnerable.
By John Miley Published
-
Kiplinger Special: The Long-Term Future of the U.S. Economy
The Kiplinger Letter Kiplinger's report into what it will take the U.S. to maintain a healthy economic growth rate.
By David Payne Published
-
The Fight Against Cancer Enters a New Phase
The Kiplinger Letter Breakthrough treatments hold promise for patients and investors.
By Matthew Housiaux Published
-
After Decades of Promise, the Virtual Reality Era Has Finally Arrived
The Kiplinger Letter VR is a paradigm shift for consumer technology. The tech has a long road ahead, but amazing hardware already puts the huge potential on full display.
By John Miley Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published