China loses out as US industries go home

Rising Chinese salaries and US wage stagnation are causing factory repatriation and a US ‘manufacturing renaissance’, managers and allocators say.

The relationship between the US and emerging markets is of increasing interest to asset managers and allocators. The historic trend of US manufacturers moving ­production to cheaper emerging market centres shows early signs of reversing, as the gap between total production costs ­narrows.

Charles-Henry Monchau (pictured), head of discretionary ­management at EFG Asset Management, says some US companies are repatriating ­production from Asia after wages and benefits for Chinese factory workers grew annually by 15%-20%. In real terms, wages have fallen slightly in America’s manufacturing heartlands since 1980.

In the States, Monchau says, “wages haven’t been rising at all, which is equivalent to a drop in real terms. As there have been lay-offs on top of that, manufacturing states in the US were hit hard. Loss of jobs and caps in wages meant a lesser buying power, creating a vicious circle for the GDP of these states”.

Boston Consulting Group says the total remuneration advantage of 55% China enjoys today could narrow to 39% by 2015 after accounting for higher productivity of US workers. At about this point, it will be cheaper for Americans to make goods at home.

Technological edge

Studies from Bank of America ­Merrill Lynch and ISI also point to the possibility of ­companies repatriating production. Boston says: “The savings gained from outsourcing to China will drop to single digits for many products.”

Monchau highlights America’s technological and educational advantage, and more savings if manufacturers need not transport dutiable goods from China’s harbours.
The fall in the dollar against major EM currencies over recent years, plus the sharp drop in prices for US ­natural gas (a key energy input cost for manufacturers) to the lowest levels among developed world countries, are all relative advantages arguing for domestic production.

The result? The so-called ‘American manufacturing renaissance’, and the fact that, for the first time in 35 years, US manufacturing employment growth exceeds national jobs growth.

Monchau says: “Leaving the labour costs to one side, the US does benefit from two major advantages c­ompared to some emerging markets: t­echnology and education.”

Automation and robotics can indeed provide the cost savings US companies are looking for without outsourcing, he adds.

Conrad Herrmann, director of US growth portfolio management for Franklin Equity Group and co-portfolio manager of the Franklin US Opportunities fund, calls such onshoring “a long-term theme that does not happen ­overnight”.


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