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Made (again) in the USA: The return of American manufacturing

June 29, 2011: 10:36 AM ET

Lost in a sea of troubling economic data is one bright spot: America is once again competing for -- and winning -- factories and manufacturing operations.

workers assembling an engine at a Volkswagen factory in Tennessee.

workers assembling an engine at a Volkswagen factory in Tennessee.

FORTUNE – Until the end of World War II, America's economy was almost completely self-sufficient. Everything it consumed it also produced. The big shift away from manufacturing came as the U.S. sought to speed the recoveries of war-ravaged Europe and Asia. Trade barriers fell significantly and soon American companies were sending emissaries abroad, looking to do business cheaper by expanding their operations overseas.

The golden era of manufacturing would never come back. By the 1980s, manufacturing made up 25% of U.S. labor; it has fallen to about half of that in recent years as technological advances that greatly reduced the costs of transportation and communication also made it cheaper to have operations outside the U.S.

But in the after glow of the Great Recession, something surprising is happening: U.S. manufacturing appears to be on the cusp of an awakening – if not a full rebirth. Companies like Illinois-based Caterpillar (CAT), the world's largest maker of excavators and bulldozers, is shifting some of its excavator production from abroad to Texas. U.S. furniture maker Sauder is moving production back home from low-wage countries. According to the report by Accenture, some 61% of manufacturing executives surveyed by the consultancy said they were considering more closely matching supply location with demand location by re-shoring manufacturing and supply.

The reasons why have more to do with problems overseas than strength at home:

Overseas workers are getting more expensive. China, known as the world's factory, is seeing wages soar ahead of productivity growth. In 2000, hourly Chinese manufacturing wages were just 52 cents compared to $16.61 in the U.S., according to a recent report by Boston Consulting Group. By 2015, the wage difference should be $4.41 vs. $26.06 – still powerfully in China's favor, but no longer a no-brain decision to hire there. And the growth rate should continue to build in China while BCG expects the US to grow at a much slower rate. As the cost savings of off-shoring narrows, BCG says it expects the return of some U.S. manufacturing.

Shipping costs keep increasing. On top of wage increases, the costs of jetting to far flung locations and more importantly, moving goods from the factory to the store keeps heading upward. In the last four years, shipping costs have risen 71% because of higher oil prices, as well as cutbacks in ships and containers, according to IHS Global Insight.

Global supply chains have shown weak links. Perhaps little highlights the issue more recently than the March earthquake and tsunami in Japan. Aside from the human tragedy, the disaster disrupted global supply chains, leaving many companies stranded without critical components. Boeing (BA), Caterpillar, and General Motors (GM), were among those concerned that the disaster would disrupt delivery of components and parts from Japan and therefore stall production.

To be sure, a so-called "manufacturing renaissance" will likely come in trickles as opposed to waves.  Products that are labor intensive such as apparel and textiles will likely continue being made overseas. Even if labor costs rise in China, there's almost always another country that would do the job relatively cheaper.

And then there's the booming emerging economies to consider.

"If companies moved operations to China for labor arbitrage, they're likely rethinking their presence there," says Craig Giffi, vice chairman of consumer and industrial products at Deloitte LLP, a consultancy. "But if they went there because of it's massively growing market and their customers are there then they're likely going to stay."

What's more, there are sizeable limits over how many more jobs re-shoring would create. The days of thousands of factory workers toiling away in warehouses are long gone, as technological advances have increasingly replaced humans with machines. While manufacturing as a percentage of the labor force has plummeted from 25% in 1980 to about roughly 12% today, the value of goods and services produced has remained 12% of the U.S. economy. In other words, manufacturing has been able to produce more even with many less workers.

Fortune takes a look at what it a revitalized made-in-the-USA label means for the country – and the world – in a series of stories on the new movement:

How to train U.S. workers back into manufacturing jobs  
Despite gloomy job prospects, many American manufacturers are on the prowl for top talent, but say that not enough workers are trained for the tasks.

The secret role of energy in bringing U.S. jobs back
How a reliable grid can trump cheap wages

Why we left our factories in China
Fed up with the poor quality of having their products made in China, American businesses like Sleek Audio are moving production back home.

Investors pile into the bet against China
Manufacturing jobs are leaving China and returning to the U.S. But many investors are betting that that may actually be the least of China's problems.

 

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

Email | @ninhaitseng | RSS

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