Lost amidst all of the negative economic news that the business media seems so focused on is the fact that there are quite a few pockets of the US economy that are doing well. One of them is a sector that was written off for dead about five years ago. I am referring to manufacturing – the sector that saw the mass flight of factories to Asian and Latin American countries over the past decade.
Now before you call me crazy or assume I am wearing rose colored glasses, according to Fortune magazine, US manufacturing is enjoying a period of rebirth and renewal not seen in a long, long time. In fact, it appears that the US is once again competitive with foreign locations in attracting manufacturing operations.
Did you think you would ever read that statement?
According to Fortune, a number of factors are driving the re-emergence of manufacturing operations in the US:
The cost of manufacturing overseas is rising.
For example, China, long the outsourcing location of choice for manufacturing operations, is experiencing a huge increase in labor costs without a commiserate increase in productivity, meaning that goods cost more to produce in China today than 10 years ago. And you get less improvement in output to boot.
According the Boston Consulting Group, in 2000, manufacturing wages in China were just 52 cents compared to over $16 per hour in the US. Now that wage differential is rapidly shrinking and is expected to do so for years to come. Although hourly wages in the US are still much higher than in China, the gap has been reduced and since productivity growth in China has slowed, moving operations there is no longer considered a no-brainer.
It costs more to ship products back to the US than ever before.
According to IHS Global Insight, shipping costs have gone up by 71% due to higher oil prices in the past four years alone! And even though oil prices have dropped slightly in recent weeks, given the current political situation in the middle-east, it is reasonable to assume that shipping costs will only continue to rise over the next five years. More and more companies are factoring this issue into the equation of where to locate factories.
Just-In-Time Delivery of off-shore goods no longer looks optimal.
As we have discussed before, the tragic tsunami in Japan had a huge impact on the world-wide supply chain. Since most companies throughout the world have moved to just-in-time supply methods, even a week or two of parts shortages can ripple throughout the entire world. Even as recently as May the US economy was still feeling the effects of the disruptions the tsunami caused in March. This is causing quite a few major US manufacturers to re-consider a more local manufacturing supply base.
A New Manufacturing Rebirth?
Will these factors be enough to re-create the manufacturing base of the US circa 1955? Probably not. However, it is clear that major manufacturers are reconsidering the locations of their future manufacturing operations.
As stated by Fortune:
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.
Think about that statistic for a moment. A significant majority of the executives running manufacturing entities are considering re-shoring some of their manufacturing and supply operations. If only half of these folks actually do so, it could lead to a nice renaissance in US manufacturing. As I asked before, did you ever think you would hear that again?
Buy or Build
What does all this mean?
Clearly, if you own a middle-marketing manufacturing company in the US you could be a prime takeover candidate. As we have posted before, it is simply easier for corporate executives to buy an existing business rather than create a new one. So if you are operating a manufacturing entity, you need to meet with an M&A advisory firm soon to prepare your company for any buyer interest. And keep in mind that a large acquisitive corporation may not be interested in the product you currently manufacture. In fact they may be more interested in your location, equipment, and skilled employees than your current industry or market focus. These buyers could come from a wider spectrum of industries than you may anticipate.
This is why creating a relationship with an M&A advisory firm is critical. You may be sitting on a gold mine and not even realize it since you assume that you only make widgets and who would want to buy a US based widget manufacturer!
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