A wealthier China increasingly can’t provide the cheap labor that once sent U.S. manufacturers overseas.
Recently, Walmart has been touting merchandise that is “Made in America.” The world’s largest retailer — whose low-cost policies have led to the offshore manufacturing of much of the nation’s consumer goods — has seemingly made a course direction toward embracing American production.
“At the heart of our national political conversation today is one issue: creating jobs to grow the economy,” said Walmart U.S. President and CEO Bill Simon in a January 15 press release. “We are meeting with our suppliers on domestic manufacturing and are making a strong commitment to move this forward.”
“We can do so much more by working in partnership – as an industry and with governments,” said Simon. “I’ve talked with a number of governors, including the incoming chair of the National Governors Association, Oklahoma Governor Mary Fallin, about how governors and retailers and manufacturers can drive this issue together. Governors from both sides of the aisle are enthusiastic about getting their constituents back to work.”
Walmart has committed to a pledge to buy an additional $50 billion in America-produced goods over the next decade. While $5 billion in additional American sales may seem insignificant to a company that has $466.1 billion in annual sales, it does register symbolically in light of the company’s previous reliance on foreign-made goods. Walmart is the industry leader for America’s big box consumer goods retailers, and in the past, competitors such as Target, KMart and Sears have followed the company’s path.
“From the beginning, Walton had bought goods wherever he could get them cheapest, with any other considerations secondary,” wrote Bob Ortega, author of the Walmart history, In Sam We Trust. Ortega reported that Walton “increasingly looked to imports, which were usually cheaper because factory workers were paid so much less in China and the other Asian countries.”
Many argue that the “Made in America” may be a consumer response to the Great Recession — a realization that not buying American goods means a loss of American jobs. But the actual reason for a switch to American-made products may be simple: Chinese goods’ prices are rising. As the price per item of Chinese-made low-end consumer goods rises, many retailers including Walmart are growing increasingly sensitive to consumer demands — particularly, the call for more American-made products.
What Walmart’s “Made in America” campaign may amount to is a field test: Walmart offers an incentive for American manufacturers to offer consumer goods that will compete with Chinese-made goods. At the end of the test, if American manufacturers were able to beat the Chinese, Walmart can switch their distribution network with confidence — as such a conversion could cost billions to complete. If not, the company would still benefit from its pro-America campaign. This “hedging” of bets reflect a shifting reality in America’s manufacturing outsourcing.
With more than 97 percent of all apparel and 98 percent of all footwear sold in America made overseas — by during the 1960s’ about 95 percent of all American-sold attire was made in the United States — a call toward an increase in American-made goods could have significant benefits for the American economy and for job growth. Over the last ten years, America has lost nearly a third of its manufacturing jobs due to outsourcing.
The revitalized call for American goods bears the potential of mitigating American dependence on foreign-made goods and reversing — at least in part — the trend of job losses in the manufacturing sector.
“No one is predicting that we’re going back to employment levels in manufacturing that we had 30 years ago,” said David Trumbull, a consultant and expert in textiles and U.S. manufacturing. “But ‘Made in USA’ is a trend we have seen and it has continued.”
While China remains the world’s leading exporter of low-end goods — accounting for a fifth of the global manufacturing output — rising labor costs, increases in land costs, tax hikes and new environmental and safety regulations have made Chinese goods no longer the price bargain they used to be. In the last five years, labor costs in China have increased by 20 percent a year or more. In Guangdong, labor costs, for example, increased 12 percent a year from 2002 to 2009. In Shanghai, the increase for the same time period was 14 percent. The comparable increase in Mexico for this time period was just one percent.
“In recent decades, cheap labor has played a central role in the Chinese model, which has relied on expanded participation in world trade as a main driver of growth,” reads the Journal of Economic Perspectives paper “The End of Cheap Chinese Labor.” “At the beginning of China’s economic reforms in 1978, the annual wage of a Chinese urban worker was only $1,004 in U.S. dollars … Back in 1978, China’s wage was only 3 percent of the average U.S. wage at that time, and it was also signifi age at that time, and it was also significantly lower than the wages in neighboring Asian countries such as the Philippines and Thailand. The Chinese wage was also low relative to productivity.”
“However, wages are now rising in China. In 2010, the annual wage of a Chinese urban worker reached $5,487 in U.S. dollars … which is similar to wages earned by workers in the Philippines and Thailand and significantly higher than those earned by workers in India and Indonesia,” the paper continues. “China’s wages also increased faster than productivity since the late 1990s, suggesting that Chinese labor is becoming more expensive in this sense as well.”
China is rapidly moving toward the “Lewis Turning Point,” in which — as predicted by Sir Arthur Lewis in 1954 — a developing economy reaches a point of having labor shortages from having labor surpluses. As, in the case of China, the labor force becomes skilled and moves to the service and high-end manufacturing sectors or migrates away from the industrial centers as a response to the global recession, employers must compete for workers, meaning that incomes and worker treatment improve. This “maturing” of the Chinese job market represents a new stage of evolution in which worker cost is comparable to the rest of the industrialized world.
The return of American manufacturing
While this is happening in China, American manufacturers are developing new ways of reducing manufacturing costs, such as designing products that are more functionally practical than aesthetically appealing. For example, a purse with eight zippered pouches has great visual appeal, but limiting the pouches to just two would reduce the manufacturing cost by half. An increased use of automation in production and a turn to streamlined production or “smart manufacturing” have lowered the cost of American-produced goods.
“[The] ‘Made In America’ theme is gaining steam not only as a way to gain market entry with such sentiment, but also since costs have truly become competitive,” said Mohan Ponnudurai, an industry solutions director with Sparta Systems and an advisor in the electronics and high-tech manufacturing sectors, to Mint Press News. “Just look at Motorola Mobility recently starting Moto X [made-to-order] production in Texas. It would have been unimaginable only a year ago to produce such labor-intensive operations in the U.S., and secondly to do it on such a scale to turn around the order in three days.”
“The costs are still high, but the benefits that come with all operations, product development and sales being so close to home makes it quicker to react and adapt to changes, which brings the efficiency and total cost to competitive levels,” Ponnudurai continued. “Also, states are offering incentives that cannot be beat. Another example is Caterpillar moving operations from China back to the U.S. and Mexico, for the same reasons.”
An end to low prices?
A critical consideration in all of this, however, is the price consumers will have to pay for domestically made goods. Despite the fact that the practice ultimately cost cuts to the manufacturing sector, Walmart and the other major retailers’ controlling of the production for low-end consumer goods lowered the price of these goods — making them more readily available to the lower classes. A shift in production cost will ultimately be reflected in the consumer cost, which could present an economic hardship at a time where many American families have not recovered post-recession.
According to the Consumer Price Index for all Urban Consumers, the price on all items less food and energy rose 1.8 percent from August 2012 to August 2013. While housing and medical costs are attributed as the primary sources of these increases, the index for personal care, tobacco and apparel items did rise.
“Consumers are always changing based on the economic cycle,” Ponnudurai continued. “During the 2010 downturn, they turned to private label or generic products, leading to growth in Walmart-like store revenues. However, when the economy rebounded, they did not all go back to the branded products. Some shifted, but some stayed. Consumer habits or buying patterns changed. Is it purely based on price? Well, for some product segments, they are price elastic and for some they are not. Consumables or non-durable goods see this fluctuation a lot, but durable goods see the shift more.”
“Take a look at the big vehicles: in 2010, the big SUVs lost favor in place of smaller, fuel-efficient vehicles because of the gas price. Since then, they have rebounded, even though many consumers have changed their driving habits hence the oil demand is lower now than in 2010,” he explained. “Consumer price increase has been in line with the COL [cost of living] or inflation index, and we have not seen greater shift that is material. Long-term, consumers are willing to pay more for durable goods that are seen as greater quality, reliable and safe. They are willing to pay more these values. But when it comes to impulse buying or low durable goods like clothing or food items, it is still hard to gauge the pattern.”
It is uncertain if this “Made in America” trend represents a new philosophy in American-bought consumer goods or simply a fad. As China segues from low-end manufacturing into high-end manufacturing — including aerospace development, automobiles and petroleum refinement — other countries such as Bangladesh, Vietnam, India, Malaysia, Indonesia, Cambodia and Sri Lanka are posed to assume leadership in the global market of low-cost consumer goods. Ultimately, the next China will emerge. Until then, however, it would appear that America’s manufacturing sector will get a reprieve and a chance to rebuild.
“This is not a public relations effort. This is an economic, financial, mathematical-driven effort. The economics are substantially different than they were in the 80s and 90s,” said Simon to the Reuters Global Consumer and Retail Summit earlier this month.
Hopefully, a return of manufacturing jobs to the United States may be the kickstart the struggling middle class needed to return to health.