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October 12, 2011

Jobs Coming Back from China

Automation means low labor wages are less of an advantage than they used to be. If you only use a few workers to achieve high output, you are less sensitive to what you pay them and more sensitive to their individual skills since each worker is responsible for an increased amount of output. As Chinese wages go up and the labor content of manufactured goods go does down, China has less of a manufacturing advantage over American rivals – so long as those rivals aren't hampered by obsolete factories or labor-increasing work rules.

There's an example from an article in The Wall Street Journal:

"Bruce Cochrane is emblematic of the incipient shift [of jobs to the US]. He's opening a furniture factory in Lincolnton, N.C., a rare event in a region and industry that have been walloped by outsourcing. Employment in U.S. furniture factories fell by 60% over the last decade.

"Mr. Cochrane says furniture made in China and sold in the U.S. previously had a price advantage of up to 50%. That's often down to 10% to 15% now, in part because wages in China are soaring—up 15% or more a year in some locales. Shipping costs, he says, have doubled from a few years ago."

Proximity to markets counts, too. It's unlikely that Cochrane will make furniture for the Chinese market in North Carolina anytime soon. But he can deliver furniture to US markets for less than it costs including freight to get it here from China. The article doesn't mention it but furniture-quality wood is in better supply in the US than in China. We don't need to import the raw materials for furniture making.

The article continues:

"…he's buying state-of-the-art saws, routers and other machinery for his facility, exemplifying why productivity is robust in the U.S.

"The flip side, though, is employment. When North Carolina's newest furniture factory is up and running, Mr. Cochrane expects to accomplish with 135 employees what it took 250 to do in the past."

Do you count this as gaining 135 jobs or losing 115? That's really an academic question. If we want manufacturing jobs in the US – and I believe we do – then we must be as automated and efficient as any rival - preferably more so.

It's not only expensive-to-ship goods whose manufacture is coming home; quality counts, too. The WSJ article tells another story:

"'We're in the process of bringing everything back from China,'" says David Gil, marketing director for Sleek Audio, which makes high-end tunable earphones. Along with rising costs in China, quality control proved a headache.

"The company sells its SA Six earphones for $250, and the price won't change when production moves to Palmetto, Fla., though costs will rise about 20%. Mark Krywko, the chief executive, says better quality control and less lost inventory will offset those increases. 'Profits will go up,' he says."

Long supply chains mean increased vulnerabilities to foreign disasters as well as our own. Currently, according to my friends in telecom, fiber optic cable is in such short supply in the US that there is a danger some broadband projects won't meet their stimulus deadlines. Turns out that raw fiber is made mainly in the areas of Japan affected by the tsunami. Smart manufacturers want diversity of supply – so long as costs are reasonably close.

It was heartening to hear most of the GOP presidential candidates last night agree that the US can survive and flourish in economic competition with China. Winning means supplying much (but not all) of the needs of our own markets for many (but not all) goods and achieving a large secondary position to foreign manufacturers in meeting the needs of their domestic markets. It doesn't hurt us at all if a US furniture manufacturer becomes stronger by building a Chinese factory to meet the rapidly-growing needs of the Chinese market; it only hurts when the US market is served by that factory instead of one here with no offsetting reciprocal trade in other products.

We have the huge advantage of being near our own market and bountiful supplies of raw material including rare earths. If we will let ourselves, we can have a huge advantage in energy price and supply. Our engineering schools still train the world's top engineers; we just need to make sure that they can flourish here and don't all leave for places where projects can be built without twenty years of regulatory delay. Rising wages in China and India not only level the playing field but also increase global demand – we can benefit from both.

Related posts:

The Inconvenient Good News in the Employment Report

Jobs Go Awaiting… Or to China

Google Finds Nothing is Shovel Ready, Not Even for Free Fiber Build

America's Industrial Revival

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