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US Manufacturers Close Competitiveness Gap With China

The U.S. economy may still be struggling to recover from a recession that began three years ago, but there is a silver lining. According to business consulting firm AlixPartners, a weak dollar and rising wages in China have helped U.S. manufacturers close the competitiveness gap with their Chinese counterparts for the first time since 2007.

A worker operates machines for making yarn at a textile factory in Huaibei, east China's Anhui province.
AFP|Getty Images

"Five years ago, China was clearly the destination you wanted to be in," Ivo Naumann, Managing Director at AlixPartners in Hong Kong told CNBC on Friday. "What happened over the last couple of years that advantage of China has by and large been eroded, so what we are seeing now is, of course, that the U.S. is becoming awfully competitive again."

AlixPartners said it compared the total cost to produce a variety of manufactured goods in the U.S. with 12 other countries, including China. It found that Mexico remained the cheapest place for U.S. companies looking to outsource manufacturing. The firm tracked changes in seven key cost drivers including exchange rates, freight costs, labor and raw materials.

Naumann said China's competitiveness had slipped because of rising wages and the strengthening of the yuan, which has gained 4 percent against the dollar this year.

"If the (dollar) continues to depreciate even if only at 5 percent per year, and if you're having wage inflation of 20 percent or so per year in China, plus you have some increase in freight costs, actually by 2015 - so in only 4 or 5 years - the U.S. and China could actually be on par, in terms of competitiveness," Naumann added.

China's manufacturing sector has already been overtaken by India, Russia and Vietnam on cost competitiveness, according to AlixPartners' research.

Naumann noted that some of the low-end manufacturing had already moved from China to Vietnam, Cambodia and Bangladesh. He also expects some contracts to move to Myanmar as the country reforms its political system and opens up its economy.

The biggest challenger to China, according to Naumann, will be Indonesia, which has a population of 240 million. "There you have a worker pool that is large enough to really absorb some of that (manufacturing) from China."

But he points out China won't stand still and will spend the next five years looking at ways to move up the value chain and improve productivity. He also believes it will be very hard for other emerging markets to replicate the large industrial base China has created over the last 25 years.