Is American manufacturing experiencing a re-birth? There has been plenty of controversy on this question over the past year or two, but there’s no doubt that it’s doing well. Dow Chemical just secured a $4 billion investment, Flextronics announced its plans to create a $32 billion product innovation center in Silicon Valley, and Airbus decided to build a $600 million assembly line in Alabama to produce its jetliners. It seems major manufacturing firms are choosing to come back to America, a process called “re-shoring” as opposed to offshoring. What’s driving this trend?
There seem to be a few factors afoot here. First, the cost gap of energy and labor has narrowed. Energy is now abundant and cheap here with the fracking boom hitting its full stride. This energy abundance is making the U.S. much more competitive, especially in the chemicals industry. Additionally, firms are not saving as much on wages overseas as they once were. Wages have been rising consistently in places like China, whose minimum wage nearly doubled from 2008 to 2013 — and will continue to increase, since minimum wage increases are required by law there.
Secondly, just as in real estate, location is everything. With the costs of production narrowing, firms are prepared to pay to be closer to their primary customer base. It allows for greater flexibility, more accurate demand forecasts, and closer alignment between R&D and production.
Thirdly, the importance of business environment and regulatory framework has been instrumental. It’s a double-edged sword, however. The United States has stronger laws to provide firms with intellectual property protection and higher safety standards; however, high corporate taxes and uncertainty about how regulations will change in the future has had negative impactfuls as well.
These are all very good signs for American manufacturing, which had been suffering for some time against global competition. Don’t expect the facilities in China or India to close and move to America, however. There’s still plenty of demand to justify their continued operations. They will probably just expand their operations to wherever the growth is originating from; and right now that just happens to be in America.