The Rebirth of U.S. Manufacturing

on June 5, 2013

“The age of labor arbitrage is over,” General Electric CEO Jeff Imelt declared at the D11 conference last week.

Signs that he is right are all around us. Today, Lenovo–a Chinese company owned partly by the Chinese government–opened its first U.S. plant in Whittset, NC., (photo) where it will make ThinkPads, commercial desktops, and servers for the North American market. Motorola announced at the same D11 conference that it will manufacture its new Moto X phone in Texas. Apple also plans to return Mac manufacturing to the U.S. at a Texas facility.

What is happening is simple. For the past 25 years or so, multinational manufacturers have chased low labor costs around the world. For a long time, China seemed like the promised land with a seemingly unlimited supply of cheap workers and and business-friendly–that is to say, extremely lax, labor and environmental standards. But a funny thing happened. The supply of qualified labor turned out to be finite after all and rates are rising. And china belatedly realized that its environment, especially the air, could only absorb so much pollution before it began poisoning its people. Growth had to slow.

At the same time, advances in robotic manufacturing mean that the labor content of electronic devices is plunging making labor costs less and less of a factor in deciding where to build. But logistics costs, especially the cost of air or ocean shipping, are going up. That’s an argument to source manufacturing closer to markets. A great deal of high-tech manufacturing will remain in china, in large part because the Chinese have developed and exquisitely well tuned supply chain to keep plants stocked with components while minimizing inventory. But some will move, in many cases, to Mexico or the U.S.

The decline of labor input helps explain why a rebirth of U.S. manufacturing will not produce a surge in U.S. manufacturing employment.  Many of the U.S. manufacturing jobs that have disappeared since the 1970s did move to China, they just vanished. And the production is coming back precisely because not much expensive labor is required. The Lenovo plant. for example, will only employ 115 production workers.

Still, growth in manufacturing is a boon for the economy. The jobs it does produce tend to be better than old factory jobs, though they also require higher skills. And factories produce a lot of secondary employment–everything from construction workers to cooks and waitstaff to transport workers.