Return of the "Made in USA" brand

[abomvubuso.livejournal.com]

Until recently, "Made in USA" used to be considered a dying brand. But now it could be seen on various Electrolux appliances, Rolls-Royces, Siemens gas turbines, cooling baskets, swimsuits, children's toys, even computer hardware. After two decades of receiving news that was mostly about this company outsourcing its production to China or the other, in recent times the US media are brimming of reports about new factories being opened back home. Or as the process is called, "reshoring".

The stories about the resurging US industry are supported by the prospects of half a million new jobs for 2013 thanks to the rebounding homebuilding industry, and the fact that for the first time in a long while, the number of employees in the production sector is growing. However, this optimism suffered some setbacks after the sequester that resulted from the political standstill in DC. The disappointing data about only 88,000 new jobs in March scared the job market somewhat, although the majority of experts continue to see a positive tendency in the long run. For example, Boston Consulting Group made a forecast of 2.5 to 5 million new jobs until the end of the decade, in result of the industrial revival and all the related businesses. Still, a closer look at the numbers draws a more complicated picture than the cloudless future everyone might be hoping for, and it reveals some interesting and important global tendencies.

The reasons for this revival are actually following an iron economic logic. And it is that the difference between the payment the Chinese workers and their US counterparts are getting, has ceased being as wide as the Pacific ocean for quite a while. While salaries keep growing at one end of the divide, particularly in the highly industrialised coastal region, at the other, they've stagnated for the last few decades. The US employees had relatively high salaries at the time China joined the WTO in 2001. But then the salaries in China started growing, and this turned the economic equation on its head. The closing gap was eloquently illustrated by the fave call of ABC news anchor Diane Sawyer to "buy American" with the argument that, if every American spent just 3.33 dollars a year for domestic production, that'd bring 10 thousand new jobs at home.

This way, China has gradually lost its major competitive advantage: cheap labour. Right now, according to a report by the Atlantic magazine, a worker at the factories of the technological subcontractor Foxconn would likely get an average salary of $400, whereas six years ago the amount was just $155. In addition to the rising estate and land prices and the growing expenses for transportation, and the huge staff fluctuations, the imminent bureaucratic and logistic problems and the low effectiveness of labour makes outsourcing far less beneficial than it used to be until very recently. A BCG research even goes as far as to claim that in the next few years the gap between the production prices in China's coastal region and those in the southern US states would drop to 10-15% or less. In that situation, moving an entire production to another continent would just not be worth all the pain.

We should also add the prospect that, while the fuel prices keep rising globally, America itself would keep experiencing a real energy revolution, thanks to its domestic oil and gas production (although there are skeptics as well). This makes domestic production far cheaper, especially as far as goods for the local market are concerned.

From the POV of other countries who've tried a number of reforms and investment strategies to revive their industry, the current positive news from America will probably sound like a great injustice. After all, the US has stopped investing in large infrastructure projects for years, and the condition of many roads, bridges and airports in the country could almost be compared to that in the Third World. Every new piece of stats about the quality of secondary education is more depressing than the previous, and it seems that keeping the recent promises about tax reform will have to be postponed for the next election cycle. But, as Harold Sirkin argues, despite these obvious flaws, America might have a big advantage that could neutralise them: economic freedom. Unlike many other countries (some in West Europe as wel), there are practically few to no legal and/or economic barriers to US companies to leave the country if they deem their production unprofitable. That's been the reason that many industries had been so easy to move to China, but on the flip-side, the same open policy is now making their return just as easy.

But despite the triumphant headlines in the US press, the return of the factories doesn't necessarily mean mass creation of new jobs. In fact, most of these new big enterprises hire very few people - when Siemens opened doors in North Carolina, they hired less than 900 workers; Rolls-Royce in Virginia has only 150. Even the new hardware factory of GlobalFoundries that's worth $7 bn, which is currently considered the largest industrial project in the modern history of the state of New York, has hired 2,000 employees, with an option to expand those to 3,000. That hardly compares even to a fairly average Foxconn factory in China during a moderately busy week. The reason for this discrepancy is the high level of automation of labour in the US. And many experts believe that this automation, not outsourcing, is the main culprit for the loss of millions of industrial jobs in the country within the last decade.

The methods that some states and districts are resorting to, in order to attract companies on their territory, is also subject to fierce debate. Under the pressure to actively aid the creation of jobs (especially around election time), their administrations are often prepared to promise huge subsidies, tax deductions or changes in local legislation. Sometimes, for the sake of ritually cutting ribbons, a bureaucrat is prepared to turn a blind eye to obvious problems. The example with the aforementioned GlobalFoundries is rather telling: the $1.4 bn subsidy that was granted to that enterprise contained some expenses that were outright awkward. An investigation by the local Times Union newspaper in Albany showed that the managers of the factory had been sending checks to the state of New York for apartments, TV sets, branded t-shirts and even purchases at the grocery. Indeed, the amounts are not so big, but the fact that the state authorities were signing the checks without even raising a single question, caused much uproar among the public.

Despite the various theories and opposing opinions, the predominant view is that the very character of industrial production changes the equation between income and expenditure. According to the stats, every dollar that's invested there, brings about a dollar and a half of returns for the economy. The reason is that an active industrial enterprise invariably brings along with itself a development of the local infrastructure, and thriving complimentary businesses (and these both create additional employment), and also close partnership with the local universities. If we look back at the GlobalFoundries example, right now in the adjacent region several high schools are working on two-year programs preparing highly qualified workers. In the meantime, the CNSI college in Albany has turned into an education and research centre of international repute, where students and teachers work in partnership with IBM, AMD and Toshiba. And now, as GlobalFoundtries is considering opening a second factory in the state, all the questions and raised eyebrows about the bills for t-shirts and TV sets seem to be ultimately buried and forgotten.

But this Renaissance of US industry does not necessarily mean an automatic loss for the Chinese one. Although the salary growth in the world's main factory will probably compel some companies to look for cheaper options like Vietnam, Indonesia and parts of Mexico, the consequences of these processes will likely be more limited than some fear. In China, the economy itself has not just been growing but also internally transforming, and that's why the companies are not hasting to shut down their local production, but rather they're redirecting them mostly to the local domestic market, or the other Asian markets. It's just that the production of the Asian juggernaut has created millions of consumers who are now fully capable of sustaining the local industry.

If we look beyond the current trend of companies returning to the US shores, there's also the more noticeable process of a creation of new small businesses. These are mostly niche products, particularly ones depending on fast and local production. For example, the designers of t-shirts or laptop- and tablet bags just can't wait for nine months until their models leave the mass production line in China. Such companies now populate workshops around towns big and small across America, often using the former premises of now defunct industrial giants (for example the former Brooklyn Navy Yard now houses 275 private-sector firms, and almost 6 thousand employees). Sure, this process is not solely typical for the US, but the local culture of tolerance to experimenting and taking risks in entrepreneurship, gives the whole process an additional push. With the help of the Internet, these "dwarf companies" are selling globally, and they can afford to dream that one day their products would reach the popularity of GAP and Apple.

Maybe only some of them would ever reach such industrial heights. But the more of them take that road, the bigger number of jobs they'll create. And the bigger the probability that one of those small companies could have the next eureka moment, and stumble upon the next big idea that could change the world in a profound way. And again, as it has happened so often in modern history, it would be carrying the Made in USA label.