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Thursday, October 27, 2011

Get Ready - The Resurgence of U.S. Manufacturing

By Michael Fonda - Chicago

I bumped into my friend Mark Goode of Venture One Real Estate at the recent Fall Conference of the Society of Industrial and Office Realtors ("SIOR") that was held in Chicago. Mark showed me an article by Boston Consulting Group (“BCG”) entitled Made in America Again: Why Manufacturing Will Return to the U.S. In this article, BCG has prepared an eye-opening analysis of the future of U.S. manufacturing. The piece (click here to read) predicts that manufacturing will return to the U.S. in a meaningful way, beginning as soon as 2015.

A combination of escalating wage rates in China, higher transportation costs from China to the U.S., supply chain risks and the cost of industrial real estate is improving the competitive position of the U.S. relative to China.

China, with 1.34 billion people, is a market that has to be serviced (and it will be by both Chinese and U.S. manufacturing plants in China). Although some manufacturing will migrate from China to India, Southeast Asia and Mexico, the U.S. (according to BCG) will begin to recapture much of the manufacturing and employment that has been lost since the 1950’s when the U.S. produced 40% of the world’s manufactured goods. If Joseph Sternberg, editorial page writer for the Wall Street Journal, is correct in the assertions he made in the article he wrote for the Journal’s editorial page on Wednesday 10/26/11, “The Phony Success of China’s Stimulus”, U.S. resurgence might even be bigger than even BCG predicts. Couple China’s possible missteps with changes being proposed by Dave Camp (R-Michigan), Chairman of the House Ways and Means Committee, regarding a transition to a “territorial tax system” (which is also being proposed by Governor Rick Perry, who is running for the Republican nomination for President of the U.S.) and there might be a tidal wave of cash returning to American shores to fuel this resurgence in goods manufactured in the United States. (Watch Representative Camp talk about his plan with Andrew Ross Sorkin on Squawk Box here.)

Global manufacturers will think strategically when deciding where to locate. They will consider total landed cost of their products, they will design flexibility into their supply chains and they will locate close to the consumer. All of this bodes well for the future of U.S. manufacturing, as long as the U.S. provides a favorable investment climate (like the proposals for a territorial tax system) and the labor force remains flexible and is well-trained.

In the August edition of Inbound Logistics, Lisa Harrington wrote an interesting piece on manufacturing returning to the United States, Is U.S. Manufacturing Coming Back - read here. In her article, she highlights Stephen Rogers' "Nine Steps to Choosing a Manufacturing Location." Harrington quotes Rogers cautionary statement regarding "reshoring" in which Rogers says, "It's expensive and difficult to bring manufacturing back to the United States, even if you kept the building. Companies underestimate the difficulty of training workers and building self-directed manufacturing teams."

BCG’s analysis focused on states in the southern part of the U.S. – Alabama, Mississippi and South Carolina. States like Illinois, although blessed with great transportation infrastructure, a large population and a world-class city – Chicago, still has work to do with regard to its bloated government and high labor costs relative to its southern neighbors. The good news is that the UAW and the Big Three (now an anachronistic term) automakers have begun to address both labor costs and sclerotic labor work rules. (I blogged about this in at the conclusion of my June 10th post. Read here.) Government reform is next. When that happens, Illinois may not only be the Number 1 climate for business in the Midwest, as Crain’s Chicago Business asserted in last week’s issue (click here to read) but possibly could climb to Top Five in the U.S.

The resurgence of manufacturing in the U.S. and Illinois….talk about hope and change!

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