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Why "Made in America" Makes Good Business Sense

Other countries can offer lower labor costs and less regulation, but the U.S. is still the number one place to make sophisticated, high-cost goods.

Location USA 2012
The global recession stripped away some of the luster from the great American industrial machine. General Motors toppled into bankruptcy, while other lesser-known manufacturers quietly fell by the wayside. The economic downturn didn't trigger the decline. America's industrial prowess has been shrinking for decades. But the global downturn made it more apparent.

Now, Americans can't switch on the TV or surf the Internet without coming across another news story documenting manufacturing's painful demise. Many now believe that in the not-too-distant future everything Americans buy, every coffee mug, solar panel, T-shirt, brake pad, and battery will be made overseas. And the popular tagline "Made in America" will apply only to Americans themselves, not an actual product. After all, many U.S. manufacturers have already left in search of cheaper labor costs to developing countries like China, India, Mexico, and Vietnam.

Yes, it's true that the number of U.S. manufacturing jobs has steadily declined over the past four decades. Manufacturing employment, as a percentage of total payrolls, has decreased from 25 percent in 1970 to just 8 percent today. One in six U.S. factory jobs has disappeared since the start of 2000. Yet, those figures don't tell the whole story.

Contrary to popular opinion, the U.S. remains a manufacturing juggernaut, producing 21 percent of all global goods in 2009, a bigger share than the Japanese, Germans, British, and Italians combined. It also offers an attractive environment for international companies to set up shop.

Notable Attributes
Despite notable economic gains by other countries, the United States remains the world's largest economy with an educated and ambitious work force. Plus, the country boasts the world's largest stock exchange and deepest gold reserves, and is home to 40 percent of the world's billionaires and 139 of the world's 500 largest companies - twice that of any rival nation.

And even though manufacturing employment may have dipped, productivity is at an all-time peak. Output, as measured per employee, has grown 70 percent since 1977. Basically, 184 U.S. workers can now do what 1,000 workers did in 1960, according to William Strauss, a senior economist at the Federal Reserve Bank of Chicago. Such attributes should not be ignored, especially by investors looking to build a portfolio of U.S. industrial facilities. Foreign investors, in particular, have an edge because of the dollar's weakness compared to some currencies like the Euro. And - let's not forget that the timing may be right.

Property values fell amid the recession and are now climbing again as the manufacturing sector is making some strong gains, thanks in part to President Obama's emphasis on industrial job creation. The White House has said publicly that the nation can't buy its way out of the recession. The country's long-term economic recovery hinges on America's ability to make and sell quality goods in the global marketplace, just as it has done in previous decades.

Most clothing, shoes, toys and low-cost electronics are made in China or another emerging nation, mostly because the lower labor cost provides an undeniable advantage in producing low-value, labor-intensive products. But an abundance of sophisticated goods like automobiles, aircrafts, pharmaceuticals, and semiconductors are still made in America.

"I want to see more products.stamped with three proud words: `Made in America,'" President Obama said recently. "We can be the ones to build everything from fuel-efficient cars to advanced bio-fuels to semiconductors that we sell all over the world. That's how America can be No. 1 again."

Cost Gap Narrowing
Political rhetoric aside, observers say this is not a far-fetched idea. Going forward, U.S. manufacturing could benefit from several global developments, including the rising cost of labor in emerging nations such as China, where total manufacturing wages jumped 70 percent from 2002 to 2006.

As the economies of more up-and-coming countries improve, those countries' wages will rise too, and the low labor costs that lured U.S. and other firms to these places in the first place may not seem as attractive.

In 2005, Chinese-produced goods arrived at U.S. destination ports an average of 22 percent cheaper than comparable goods made in the United States, according to the consulting firm AlixPartners. But fast-forward to the end of 2008 and that average price gap had narrowed to just 5.5 percent.

Globally, the cost of transportation is growing, too. Freight costs are increasingly offsetting, and in some cases eclipsing, any savings from cheaper labor as oil prices trend higher. When oil is less than $70 per barrel, placing a manufacturing facility in India or China might make sense. But when the price spikes above $100, the decision becomes harder to justify.

The United States still has a long way to go before it can claim domestic manufacturing has fully recovered but there are signs of a small resurgence. For instance, a new $1 billion Volkswagen plant opened this year not in China, Mexico, or even Germany, but in Chattanooga, Tennessee. The popular German automaker said its decision was based in part on the facility's proximity to a large U.S. consumer base, a weaker dollar compared to the Euro, supply chain and logistics advantages, and a strong work force. The state-of-the-art manufacturing plant, a producer of the all-new 2012 Passat sedan, will eventually employ up to 2,000 American workers.

Appliance maker Whirlpool Corp. also chose to stay at home. The company's manufacturing complex in Cleveland, Tennessee, was more than a century old and in need of major upgrades. Instead of moving to Mexico - an option the company considered - Whirlpool spent $120 million to build a new plant last year in Tennessee, it's first new U.S. factory since the mid-1990s. Although labor is cheaper in Mexico, Whirlpool decided to save on freight costs since most of the plant's products are sold to U.S. consumers.

In a similar move, U.S. elevator manufacturer Otis Elevator Co. recently announced that it is moving production back to the United States from Nogales, Mexico. It will build a plant in Florence, South Carolina, with around 360 jobs in a bid to be closer to its customer base, which is primarily on the U.S. Eastern Seaboard. It also wanted easy access to its skilled U.S. labor force of designers and engineers. The company cited the need to rationalize the supply chain by keeping operations in one place and decreasing its freight and logistics costs.

A recent survey by consulting firm Accenture shows that other companies may follow the lead of Otis, Volkswagen, and Whirlpool. More than 60 percent of U.S. manufacturing executives said they were considering relocating factories back to the United States or Mexico from lower-wage-rate Asian countries due to rising transportation costs, according to the study.

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