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China’s playing field levels

By Chemical Engineering |

For a little over two decades now, China’s rise in the chemical process industries (CPI) has often appeared to outsiders like a runaway reaction. Low wages, a very low-valued currency and certain government policies have provided the perfect migration spot for jobs, contracts and intellectual property that had previously been sheltered in developed nations. According to analysts, however, China’s wage advantage — arguably one of the most crucial factors in the equation — could evaporate in less than five years.

In fact, according to a recent analysis by The Boston Consulting Group (BCG; Chicago, Ill.; www.bcg.com), the U.S. is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world. “All over China, wages are climbing at 15 to 20% a year because of the supply-and-demand imbalance for skilled labor,” says Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30% cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30% of a product’s total cost, manufacturing in China will be only 10 to 15% cheaper than in the U.S. — even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin says.

Meanwhile, Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA; Rockford, Ill.) highlights another comparison that brings the issue into an even stronger light. In a recent economic update newsletter, Fabrinomics, he says, “If one looks at the managerial levels and among skilled workers, the rate of Chinese wage growth is about 135% per year; in the U.S., that same group is seeing wage growth of 3.7%. The Chinese pay scale is still far less than in the U.S., but that gap is closing very fast.”

Kuehl admits China has made great strides in terms of productivity — an improvement by a factor of ten in the last 20 years. Yet, he claims, this still leaves China at one-third of the productivity the U.S. boasts, and the U.S. is seeing productivity gains of almost 8% per year these days.

“The amazing observation from all this is that China is not going to have a cost advantage over the U.S. after 2015,” he says. “If, as expected, the Chinese are forced by inflation threats to start pushing the value of their currency higher, the balance could shift pretty quickly. Then there is the potential for much higher transportation costs as the price of oil rises.”

Kuehl believes that for both nations, future emphasis will be on the domestic market, and that could well be significant for the U.S. manufacturer in a variety of ways. “If China shifts its attention to its own domestic market and away from exports, it will allow U.S. producers to recapture domestic market share,” he says. “As the U.S. manufacturing company looks to its own market, it will be generally better positioned than the Chinese competitor, as the distribution infrastructure in the U.S. is better suited than China’s.”

According to Kuehl, most everything in China’s transportation network is currently pointed out of the country to service export, and its internal transportation system is often inferior. China will need some infrastructure work to be able to service its domestic markets as effectively as U.S. suppliers are able to service American customers.

Rebekkah Marshall

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