Will China Troubles Resurrect Made-in-America Brand?

By IndustrialsFOXBusiness

The push by Apple (NASDAQ:AAPL) contractor Foxconn to clean up working conditions in China underscores a desire for worker equality that has swept across emerging-market countries in recent years.

Continue Reading Below

Some believe the sweeping changes could have a small ripple effect in the U.S., pushing American companies to ship manufacturing jobs back home, or at least closer to U.S. borders.

Apple's largest iPhone maker may be one of the first, and biggest, foreign contractors recently to launch a major campaign to improve conditions for workers in emerging markets, but others may follow as pressure mounts on multinational companies.

A desire for equality has blanketed the developing world, from Indonesia, where disruptive strikes last year led some government officials there to raise wages, to China, where the treatment of workers has long been an issue.

Yet, increasing wages while cutting hours and improving living conditions squeezes the already tight margins of Western companies that have for years taken advantage of cheap, trainable labor abroad.

For some, foreign manufacturing is becoming far less desirable than just a few years ago.

In a note released earlier this week by Ed Yardeni, chief investment strategist of Yardeni Research, “the winner” in the Foxconn scenario is U.S. manufacturers.

He says the company’s pledge to cut down on illegal overtime, improve housing conditions and hire more employees, will likely raise labor costs throughout China, especially if others follow suit, which would increase the attractiveness of operating in the U.S.

Frank Vargo, who is the National Association of Manufacturers’ [NAM] vice president of international economic affairs, said he is seeing “more discussion” among member companies that they are bringing some production home because China is becoming more expensive.

That would inevitably bring jobs back to the U.S. and boost productivity and production.

The Institute for Supply Management’s manufacturing index climbed to 53.4% in March from 52.4% the month prior, while its production index improved to 58.3% from 55.3%, a sign U.S. manufacturers are expanding.

Of course, labor costs are just one part of many expenses incurred by companies operating abroad. Other pressures, such as transportation, which has become an increasingly bigger line item on balance sheets with the rise in oil prices, and the depreciating yuan, are also pushing manufacturers to rehash their strategies.

Labor only takes up about 25% of U.S. manufacturing costs, according to an estimate from NAM. But as those costs rise along with other expenses, the ability to be sustainable in emerging markets decreases.

“I think we’re beginning to learn some of the hidden costs of global supply chains, including their susceptibility to catastrophic collapse and fuel prices,” said Marshall Meyer, a professor at the University of Pennsylvania’s Wharton business school.

Shipping carriers, particularly those in the ocean cargo business, are losing money due to overcapacity and higher costs of oil, Meyer said. That could lead to an industry-wide consolidation that would ultimately reduce capacity and boost shipping rates, similar to what the airline sector has been undergoing for the last decade.

That, in turn, would make it even more expensive for foreign manufacturers such as Foxconn to ship goods, such as the iPad, to their clients in the U.S.

“My gut says that logistics/supply chain issues rather than labor costs will ultimately drive jobs back to the U.S.,” Meyer said.

On the other hand, some companies may find that the cost of returning to the U.S. is far worse than the rising transportation and labor costs. The U.S. has been criticized for scaring away business with painful corporate taxes, which are the highest in the world among industrial countries.

While Foxconn “will have some positive effect on bringing manufacturing back to the U.S.,” particularly capital-intensive jobs, Vargo said it may make sense for some companies to keep more labor-intensive manufacturing overseas.

China still has an advantage in manufacturing infrastructure, both physical and human, as well as an extensive array of highly-skilled workers, including engineers, according to Meyer.

“Some jobs might return to the U.S., but not millions,” he said.

Other companies may move to even cheaper emerging markets, like Vietnam, or settle just outside domestic borders, such as Mexico. Some companies in China have already relocated manufacturing inland, where wages are lower.

If a manufacturer isn’t ready to jump back into the U.S., Vargo says their relocation to border countries like Mexico, rather than markets farther away in Asia, would benefit the U.S. economy in the long run.

Mexico spends about half of the money it earns in the U.S. China only spends about 8%, according to the NAM.

“The mere fact of moving to Mexico will increase U.S. exports and decrease the deficit,” Vargo said. Though, if labor conditions in China improve, workers there may have more of an incentive to buy better-quality American goods.

“Everyone benefits from having labor conditions in China improve,” Vargo said. “Will it lead to a flood of jobs back to the U.S.? Probably not, but it’s helpful.”

What do you think?

Click the button below to comment on this article.