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China—a low-cost maker of goods—is falling behind in the global manufacturing race as rising wages and energy costs put pressure on the Asian country, synonymous with making super cheap stuff.
China is among several economies whose manufacturing price advantage over the U.S. is eroding, according to new data released Tuesday from The Boston Consulting Group. Other countries that are becoming less cost competitive include Brazil, Russia, the Czech Republic and Poland.
On the flip side, moderate wage growth and lower energy prices are making the U.S. and Mexico more desirable manufacturing destinations. The upshot? More U.S. businesses are likely to produce goods closer to home in the coming years.
"This means companies will start to move manufacturing out of those expensive countries if they can, to cheaper countries like the U.S.," said Hal Sirkin, a senior partner at The Boston Consulting Group.
Recent U.S. government data show similar gains. Industrial production increased 0.4 percent in July for its sixth-consecutive monthly gain, the Federal Reserve reported last week. Manufacturing output advanced 1 percent in July, its largest increase since February.
"It used to be a simple rule: Manufacturing is cheaper in Asia and South America," Sirkin said. "But it's fundamentally changed. "
While thousands of U.S. manufacturing jobs that were lost to overseas production won't be recovered overnight, the landscape is changing. And the manufacturing shifts are especially dramatic in China.
Wages in the most populous nation are soaring. By comparison, Mexican manufacturing labor in 2000 was roughly twice as expensive as in China. But since 2004, Chinese wages have grown nearly five fold, and Mexican wages have risen by only 67 percent—less than 50 percent in dollar terms.
Higher energy costs also are dampening China's manufacturing prowess. The cost of industrial electricity rose by about 66 percent in China and 132 percent in Russia. The cost of natural gas soared by about 138 percent in China and 202 percent in Russia from 2004 to 2014, according to Boston Consulting research.
While Russia is a key exporter of natural gas, higher production of U.S. shale gas has pushed U.S. energy prices down sharply. Russia, meanwhile, still relies on conventional natural gas, which has become more expensive.
According to Boston Consulting's global manufacturing cost-competitive index—with the U.S. pegged at 100—China came in at 96 this year. In other words, it's 4 percent more expensive to manufacture in America versus China. China's reading used to be lower in the 80s, which means the cost of making goods in the U.S. compared to China has since narrowed.
"We see China as getting much more expensive," said Sirkin, co-author of several reports on the shifting economics of global manufacturing.
If manufacturing in China is getting dicier, the prospects for the U.S. and Mexico are improving. And cheaper energy prices are a key reason why.
Natural gas prices have fallen by 25 to 35 percent since 2004 in North America due to large-scale production of shale. Hydraulic fracturing, or fracking, forces natural gas and crude oil out of shale buried deep below the earth by using highly pressurized and treated water.
U.S. wage growth also has been slow. The current hourly, federal minimum wage is $7.25. Efforts to raise the federal minimum to $10.10 an hour, if passed, would affect the service industry.
Most manufacturing jobs, though, already are in the range of $10 to $15 an hour and would not be impacted by a federal wage change.
But as any business owner will explain, wages and energy costs aren't the only factors.
Logistics and the overall ease of doing business can influence potential manufacturing locations. For example, Armaly Brands' Brillo steel wool soap pad has never outsourced production or its labor overseas, and Brillo products are made in Michigan and Ohio. Armaly Brands employs about 125 people at two manufacturing plants, with plans for a third location in Michigan.
While manufacturing costs may have been cheaper in Asia in prior years, duplicating the company's synthetic sponge technology overseas would have been difficult. Keeping manufacturing local also makes inventory management easier and provides flexibility, said John Armaly, chief executive officer of Armaly Brands, based in Walled Lake, Michigan.
And domestic production means better quality control. "The quality of some of the products made overseas is not the same as we produce in the states," Armaly said.
As businesses continue to recalculate the costs of manufacturing in China, some industries are forecast to reach a tipping point in around five years and begin shifting manufacturing to the U.S., according to a Boston Consulting report released in 2012.
Those sectors include computers and electronics; appliances and electrical equipment; furniture; and transportation goods such as truck components and bicycles. These industries have relatively low labor cost components and high transportation related costs so they likely would return to the U.S. first.