By forecasting the annual cost increases based on the yearly impact of wage inflation and the appreciation of the Chinese yuan, ICA has modeled the TCO for a period of five years. The results of the five-year forecast model show that the initial higher TCO in the United States will be eliminated in the medium to long run.
After adjustments are made to account for American workers' relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product's total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the United States - even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely.
The global competitiveness benchmark, the "reshoring" trend, and the business case simulation explored in ICA's U.S. Competitiveness Report 2011
indicate that corporations should give - and are increasingly giving - more priority to the softer factors, as these embrace a lot of hidden costs. Also, as foreign investments are long-term commitments to a country, a "snapshot" of a country's investment climate alone is insufficient. Forecasting (inter)national trends adds significant perspective to the process of foreign investment decision-making. It is exactly this combination of the competitive and low-risk investment climate, with relatively stable wage inflation, increased productivity levels, and a skilled U.S. labor pool - compared to rapidly rising labor costs and seemingly overheating economies in Southeast Asia - that is shifting the global landscape of FDI.