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U.S. vs. China: Look at More than Labor Costs Before Deciding

U.S. vs. China: Look at More than Labor Costs Before Deciding

September 13, 2012

For years, the focus of conversations around where manufacturing is done – whether in the U.S. or overseas – has been on labor costs. But a new report released by PwC says that labor cost is only one part of a much larger story. The report, "A Homecoming for U.S. Manufacturing?", highlights seven factors – including labor costs – that contribute to the decision of where to manufacture goods.

“Industrial manufacturers may increasingly rethink their U.S. strategies, including the merits of continuing to separate production and R&D and producing abroad and importing back to U.S. buyers," said Bob McCutcheon, PwC’s U.S. Industrial Products leader. "Depending on the industry, there may be considerable benefits to establishing regionalized supply chains and R&D facilities in the U.S., such as reducing costs, shortening lead times, protecting intellectual property and mitigating many of the risk factors inherent in developing markets."

Here are the factors PwC outlines in the report:

1. Transportation and energy costs: Global demand for energy resources has increased the costs of producing products in overseas markets and, even more so, the costs for shipping those products to where the customers are – and there's little sign of that demand falling off.

2. Currency fluctuations: Generally speaking, the U.S. dollar depreciated during the last decade, and China’s currency has risen. This narrows the cost gap for production.

3. U.S. market demand: GDP growth forecasts point to the U.S. continuing to be the primary demand market for many U.S. goods – which in turn supports investment in domestic production.

Related: Saving American Manufacturing: Growth Planning for Small
and Midsize Manufacturers

4. U.S. talent: The U.S. can still boast of a higher level of education and training for its workforce when compared with China, though the gap is narrowing. And as demand for more skilled workers in manufacturing increases, the U.S. looks to be the stronger source for this type of talent.

5. Availability of capital: Though the U.S. banking system is by no means strong yet, there are signs that borrowing in China is becoming more difficult, especially for exporting companies.

6. Tax and regulatory climate: The U.S. now has the highest statutory corporate tax rate among developed countries as of mid-2012, but U.S. corporations tend to have a much lower effective tax rate. That said, the uncertainty that is currently dominating the tax conversation may dampen the outlook for domestic expansion.

7. U.S. labor costs: The U.S. is often viewed as a high-cost labor environment, but other countries are rapidly catching up. From 2008 to 2011, China’s hourly manufacturing labor costs rose by over 80 percent and are expected to rise at a similar rate for the next four years. In a recent webcast, Yingying Xu, an economist with the Manufacturers Alliance for Productivity and Innovation (MAPI) forecast that China's minimum wage will continue to trend upward at a rate between 15 and 20 percent over the next five years.

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