Oct. 25, 2011 — The full PDF of Boston Consulting Group’s “Made in America, Again” report is publicly available from the BCG site here. These excerpts have been annotated by Remapping Debate. Numbers in square brackets represent the page of the report from which an excerpt was taken. You can see each annotation by placing your cursor over highlighted material.
From the introduction:
Reassess your China strategy
For many products that have a high labor content and are destined for Asian markets, manufacturing in China will remain the best choice because of technological leadership or economies of scale. But China should no longer be treated as the default option. [2]
For more than a decade, deciding where to build a manufacturing plant to supply the world was simple for many companies. With its seemingly limitless supply of low-cost labor and an enormous, rapidly developing domestic market, an artificially low currency, and significant government incentives to attract foreign investment, China was the clear choice. [3]
…Automation and other measures to improve productivity in China won’t be enough to preserve the country’s cost advantage. Indeed, they will undercut the primary attraction of outsourcing to China — access to low-cost labor… [3]
This statement reflects BCG having advised companies in the past that China was the best choice, as well as its current judgment: companies with the specified characteristics should continue to “offshore” to China.
A choice is only simple if there aren’t a variety of values to incorporate into one’s analysis. BCG apparently did not think that there were.
Presented as the best and appropriate choice, independent of national interest or of social or environmental impact.
Here is an unvarnished statement of the “primary attraction” — it is low-cost labor, not other factors, that drives (and, apparently, should drive) the movement of capital.
From the main body:
The U.S. “Decline” and Renaissance in Perspective [4]
…fueled by a relentless wave of imports from a reconstructed Europe and eventually from Japan, the U.S. experienced a dramatic loss of market share in industries such as color TVs, steel, cars, and computer chips. In the 1970s and 1980s, fears of the loss of U.S. industrial competitiveness were particularly acute, prompting a widespread debate over whether the nation should adopt a “Japan Inc.”-style industrial policy and teach its schoolchildren to speak Japanese. Then came the rise of such East Asian Tigers as South Korea and Taiwan, which led to a massive transfer of production of labor-intensive goods, including apparel, shoes, and toys, and then of much of the U.S. computer and consumer-electronics manufacturing industry. [4]
The U.S. suffered through many painful adjustments to these challenges. Unlike most nations, however, it quickly ripped off the Band-Aid and allowed industry to adapt. [4]
Factories closed, companies failed, banks wrote off losses, and workers had to learn new skills. But U.S. industry and the economy responded with surprising flexibility and speed to reemerge more competitive and productive than ever. By the late 1990s, American companies dominated the world in high-value industries such as microprocessors, aerospace, networking equipment, software, and pharmaceuticals. Manufacturing investment, output, and employment surged. [4]
The use of quotation marks is another way of saying “the so-called decline” of U.S. manufacturing.
The rhetorical technique here is to suggest that many Americans panicked and were ready to abandon previously existing skepticism regarding both the need to learn a foreign language (that prospect implying to some a loss of American dominance) and the utility of having a coordinated industrial policy. The report goes on to make clear that the panic was unnecessary because clear-eyed American companies turned out to be resilient.
Unlike other countries that foolishly tried to protect workers, the U.S. heroically resisted that path and let nature (the market) take its course.
Here the report explicitly suggests that the suffering of companies, banks, and workers was equivalent, a view with which many experts disagree. And the tale continues on an optimistic note: everything worked out for the best. This section puts the previous dismissive use of “decline” in context: in reality, the fittest companies not only survived but grew stronger as they shed romantic, paternalistic notions of proper behavior towards workers, creating a new, harsher norm.
…From 2000 to 2009, China’s exports leapt nearly fivefold, to $1.2 trillion, and its share of global exports rose from 3.9 percent to 9.7 percent…In the U.S., meanwhile, the loss of some 6 million manufacturing jobs and the closure of tens of thousands of factories over the past decade has fanned frequent warnings of a manufacturing crisis. [5]
China joined the World Trade Organization in 2001. Despite confident predictions from the backers of increased globalization that the process would raise all boats, the results have not been good for many U.S. workers.
The Tide Is Turning
Once again, however, predictions of the demise of American manufacturing are likely to prove wrong. The U.S. manufacturing sector remains robust. Output is almost two and a half times its 1972 level in constant dollars, even though employment has dropped by 33 percent. Despite the recent wave of outsourcing to China, the value of U.S. manufacturing output increased by one-third, to $1.65 trillion, from 1997 to 2008 — before the onset of the recession — thanks to the strongest productivity growth in the industrial world. Although China accounted for 19.8 percent of global manufacturing value added in 2010, the U.S. still accounted for 19.4 percent — a share that has declined only slightly over the past three decades. [5]
A disaster for domestic employment is presented as a side issue: the key is that output is up, not that the benefits have flowed exclusively to companies and not workers.
The report does not question why the unmatched productivity growth has failed to redound to the benefit of American workers.
The conditions are coalescing for another U.S. resurgence. Rising wages, shipping costs, and land prices — combined with a strengthening renminbi — are rapidly eroding China’s cost advantages. The U.S., meanwhile, is becoming a lower-cost country. Wages have declined or are rising only moderately. The dollar is weakening. The workforce is becoming increasingly flexible. Productivity growth continues. [5]
Our analysis concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U.S. where factories are likely to be built. Factor in shipping, inventory costs, and other considerations, and — for many goods destined for the North American market — the cost gap between sourcing in China and manufacturing in the U.S. will be minimal… [5]
When all costs are taken into account, certain U.S. states, such as South Carolina, Alabama, and Tennessee, will turn out to be among the least expensive production sites in the industrialized world. As a result, we expect companies to begin building more capacity in the U.S. to supply North America. The early evidence of such a shift is mounting… [5-6]
Ford Motor Company is bringing up to 2,000 jobs back to the U.S. in the wake of a favorable agreement with the United Auto Workers that allows the company to hire new workers at $14 per hour… [6]
Unabashedly presented as an entirely positive development.
This, too, is unabashedly presented as an entirely positive development.
In this world view, a company would only consider those parts of the United States where costs are low. The statement about “where factories are likely to be built” is important: it is presented as a self-evident truth, when, in fact, its validity depends: (a) on labor being kept weak in the parts of the U.S. being referred to (selected Southern states, as the report later makes explicit); and (b) there being no restraints on companies relocating as part of a ratchet-costs-down-regardless-of-impact strategy. In fact, the statement is more about what the firm thinks should happen (that is, the environment that should exist and the pathway companies should take).
A report like this is itself the type of ammunition that these states will use to attract businesses engaged in a race to the bottom (or near-bottom). And it will be ammunition as well for those who seek to reduce worker protections in other parts of the United States.
BCG is apparently referring here to the agreement between the UAW and General Motors. “Favorable” to the automaker can have two meanings here: first, the fact that, as a matter of negotiation, GM took what had initially been sold as a temporary introduction of a two-tier wage system and made it, for the foreseeable future, a permanent one. It can also reflect BCG applauding this type of labor agreement that reduces second tier wages to 50 percent of first tier wages.
China’s rising wages
…From 2005 through 2010, wage hikes [in China] averaged 19 percent per year, while the fully loaded cost of U.S. production workers rose by only 4 percent…. [7]
It is also possible that [the trend of higher wages in China] will accelerate. Chinese labor organizations are gaining a greater ability to demand higher wages and benefits from foreign companies. The government is enacting new labor laws that give greater rights to workers, requiring, for example, that companies pay laid-off workers one month’s salary in severance for every year that they worked. [8]
Productivity Insufficient to Offset Wage Increases
…To illustrate how the math is changing, let’s look at a hypothetical part for a car assembled in the U.S. One option is to make the part in the U.S. south — say, in South Carolina. The alternative is to make it in the Yangtze River Delta…[9]
In 2000, it would have made economic sense to source the part in China, where wages were about 20 times lower. Now fast-forward to 2015. The U.S. labor cost for the part will come to $3.31. At a factory in the Yangtze River Delta, workers will still be earning only one-quarter of their U.S. counterparts’ wages. However, even with massive productivity improvements, output per worker at the Chinese factory will be only 42 percent that of a southern U.S. plant. So the Chinese labor cost for the part will be $2.00, bringing the savings down to 39 percent. Moreover, since labor represents approximately one-quarter of the total cost of making the part, the total savings will shrink further, to less than 10 percent… [9-10]
BCG’s lens is very clear: when the cost of a production worker rises less than 1 percent a year, that is good. The broader impact on the American economy of worker incomes shrinking in real-dollar terms is not part of the picture.
Some would say that increasing labor protection for Chinese workers is a good thing in its own right. BCG only analyzes the issue in strategic terms: higher wages for Chinese workers mean less of an advantage for companies seeking the lowest-cost workers. Under that type of analysis, if the U.S. government were to increase protections, the cost gap would widen and make it appropriate for offshoring to China to become the “default choice” again.
A highly constricted and constricting view of the options. A company should not be thinking, it appears that BCG is saying, of locating a plant in other, higher-wage parts of the U.S. The implicit policy advocacy is the presentation of alternatives in a way to suggest that the only way that states and regions can “get in the game” is to mimic their low-wage counterparts.
This statement reflects the firm’s cheerleader role in urging American businesses to turn away from American suppliers. It is also one of the few places in the report where, even indirectly (by modifying the word “sense” with the term “economic”), there is any realization that there can be other kinds of “sense” (those other kinds of sense — moral, environmental, equitable, or patriotic, to name a few — are not part of the report). Note, too, that there is no acknowledgment that what makes “economic sense” is a reflection of rules that governments have decided to impose or not to impose, and that those choices can be modified to reflect a different set of values.
The Limits of Automation
It might seem that greater investment in automation would solve the problem of China’s lower productivity. Multinational companies would merely have to install the same equipment used in their factories at home. That, however, would undercut the chief competitive advantage of manufacturing in China — low labor costs. Automation reduces a product’s labor content. Despite the greater productivity that automation would afford, China’s total cost advantage over the U.S. would likely not increase significantly as a result… [10]
Here is the unvarnished story of why BCG, McKinsey, and their colleagues urged offshoring for so long: “the chief competitive advantage of manufacturing in China — low labor costs.” That the workplace environment in China was strikingly similar that of the U.S. in the early days of industrialization — ultra-low wages, with limited automation part and parcel of poor working conditions — has been of no account to the firms when they offered (and offer) their advice.
Other Low-cost Countries
It might seem reasonable for many companies to look for sourcing opportunities in other low-cost nations and to shift much of their export manufacturing from China to these cheaper locations. Fully loaded hourly manufacturing wages average $1.80 in Thailand, 49 cents in Vietnam, 38 cents in Indonesia, and 35 cents in Cambodia. There has already been a significant transfer of work in apparel, footwear, sporting goods, and other labor-intensive products to South and Southeast Asia… [11-12]
[Mexico] has the potential to be a big winner when it comes to supplying North America. It has the enormous advantage of bordering the U.S., which means that goods can reach much of the country in a day or two, as opposed to at least 21 days by ship from China. Goods imported from Mexico can also enter duty-free, thanks to the North American Free Trade Agreement. In addition, by 2015, wages in Mexico will be significantly lower than in China. In 2000, Mexican factory workers earned more than four times as much as Chinese workers. After China’s entry into the WTO in 2001, however, maquiladora industrial zones bordering the U.S. suffered a large loss in manufacturing. Now that has changed. By 2010, Chinese workers were earning only two-thirds as much as their Mexican counterparts. By 2015, BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25 percent higher than the cost of using Mexican workers… [12]
If cost is the only criterion, no other values are considered, and no more socially-protective rules are introduced.
An alert for companies to keep their eye on offshoring potential in Mexico if, as BCG expects, labor in that country becomes, in relative if not absolute terms, cheaper (that is, more debased) than labor in China. The only problem, the report goes on to say, is that Mexico needs to solve problems of “personal safety, skill shortages, and poor infrastructure.”
The Role of Government Incentives
Governments in Asia and Europe have used generous financial incentives to persuade multinational companies to build high-tech plants in targeted industries. Frequently they offered terms that the U.S. could not match, such as ten-year holidays from corporate taxes, cash grants, and cheap loans. In recent years, the federal government and many states have closed the gap with aggressive incentive packages, making the U.S. more competitive in the chase for manufacturing facilities… [12-13]
“Aggressive incentive packages” are praised as helping in a “chase” for manufacturing dollars. In that kind of “chase,” of course, it is the companies that are in the driver’s seat, and the U.S. government and state governments are mere supplicants. Thus, while the report frequently urges companies to think strategically, it makes no proposals for governments to do the same (for example, by altering the playing field to exercise more leverage). It is apparently hoped that governments won’t question the orthodoxy that they are powerless in the face of what is and what should be limitlessly mobile capital.
The Implications for Companies
The shifting cost structure between China and the U.S. will present more manufacturing and sourcing choices. For many products that have a high labor content and are destined for Asian markets, manufacturing in China will still make sense because of technological leadership or economies of scale. But China should no longer be treated as the default option. [13]
Companies should undertake a fresh, rigorous, product-by-product analysis of their global supply networks that takes into account the total cost of production. Rather than fixate on labor rates, this analysis should factor in worker productivity, transit costs, time-to-market considerations, logistical risks, energy costs, and other expenses in a range of scenarios. Companies should also make sure that their supply chains are flexible, dynamic, and globally balanced, providing the leeway to shift production and sourcing to other locations when the time is right. And they should weigh the many intrinsic advantages of locating manufacturing close to consumers, such as the ability to more quickly get products into the hands of customers, replace depleted inventory of popular items, and make design changes in response to market trends or customer demands. [13-14]
In some cases, companies may find that now is the time it makes tactical sense to move some production away from China and into the U.S., Mexico, or Southeast Asia. Manufacturers that remain in China for economic or strategic reasons will have to find dramatic ways to improve efficiency if they are to preserve current levels of profitability in the face of double-digit annual wage hikes. [14]
More-strategic decisions will have to be made when the time comes to consider where to build new manufacturing capacity to serve markets outside of China. Our analysis suggests that the U.S. will become an increasingly attractive option, especially for products consumed in North America. As long as it provides a favorable investment climate and flexible labor force, the U.S. can look forward to a manufacturing renaissance. [14]
In other words, until now, in BCG’s view, it was appropriate to have China be the default option when American companies considered where to locate their manufacturing operations. The fundamental factor that companies should look at — cost — hasn’t changed. If it is cheaper to keep on building in China, do that. If cheaper in a third country, do that.
A crucial operational principle: companies should avoid loyalty to or dependence on any country, state, or community. Instead, they should be positioned so that the host governmental entity knows that they are there only so long as that governmental entity is prepared to be more compliant than any other.
When everything is a matter of tactics, it does not occur to the analyst that there is anything to distinguish between and among China, the U.S., Mexico, and Southeast Asia other than the factors described in the preceding sentence — vastly different social conditions and impacts notwithstanding.
Translation: policymakers need to understand that America has prospered by being deferential to business. If that hands-off policy is tinkered with, bad things will happen. Don’t regulate in general, and don’t either help re-empower labor or restrict the movement of capital in any way.