Is there a homecoming for American (textile) manufacturing?

Is there a homecoming for American (textile) manufacturing?

By Virginia F. Bodmer-Altura

In America there is a strong feeling that there should be a homecoming for American manufacturing and in particular for textiles. However in Europe the thinking is different, perhaps a re-location to Southern or Northern Europe might be an option, but repatriation seems to be exempted

An interesting study of September 2012 by pwc PriceWaterhouseCoopers, worldwide Management Consultancy, finds comprehensive reasons and facts for a homecoming of certain manufacturing in America, especially for chemicals and the metal sector. The reasons: transportation and energy costs, a re-shoring of R&D and the manufacture. The thesis: Localising production can mitigate supply-chain disruptions – totalling USD 2.2 billion in financial impacts for the American industrial products companies in 2011. The analysis finds for instance, that manufacturing steel products in the USA instead of China can provide a net costs’ benefit of 2 % of revenues.

Historic view

Reviving domestic manufacturing has been at the core of lifting the United States economy through – and in the wake of – the Great Recession in the 1920’s and 1930’s. Lately, industrial output has experienced a slow uphill beat since 2009. However, it still hovers below pre-recession levels, while manufacturing employment has risen to a lesser extent. Is this rebound simply a traditional recovery or is the U.S. manufacturing sector poised to enter a second golden age? If so, what will drive such a reconnaissance?

Consensus views on such a resurgence have been, to a large degree, shaped by the thinking that rising labour cost in markets such as China are driving manufacturers back to the U.S. Rising wages in emerging markets form certainly part of the story, but will likely pay a less prominent role, than other factors in manufacturers’ decision to re-shore or on-shore to the USA. These are the major conclusions of the pwc team and the additional contributions by Michael Protnoy, Manufacturing Analyst and Thomas Waller US Industrial Products Director. The authors reveal also “that a cyclical rebound in the US manufacturing sector is under way, but this one is buttressed by ne – and potentially long enduring – structural changes.

The drivers of manufacturing resurgence

The drivers of manufacturing resurgence are labour, transportation, energy and material costs, as well as demand, talent, availability of capital, taxes and currencies. All of those are influencing also the textile manufacturing. We have reported on the initiatives to protect American Textiles at political levels. The changes in some of these areas could extend the recovery beyond what might be expected in a typical economic upturn. Even if an increase in the relative competitiveness of US labour costs were to unfold, it seems to be unlikely sufficient to result, in itself, in a domestic manufacturing resurgence.

On the other hand transportation and energy costs and currency fluctuations are the most salient reason US manufacturers will choose to produce closer to their major customer bases. And, for manufacturers with principal customer bases located in the US, this means re-shoring production back to the US Market. These seem to be decisive factors also for the manufacturing of textile products. Table 1 / Figure 2  gives the positive and negative factors influencing such decisions.

1_pwc-us-manufacturing-resurgence-1-3 (zip)

If such a shift back to the US would likely lead to improved employment demand in the US by manufacturers in both the production and R&D areas.

Reuniting R&D and production in the States

Historically there has been a strong link between manufacturing and domestic R&D investment, with 70 % of all private funds spent on R&D is coming from this sector. It is noteworthy that companies that have moved production back to the US – or are opening new production facilities there, have often cited R&D location as a factor. It is noteworthy to underline, that collocating R&D activities, innovations and patenting – the US are still top ranking worldwide – is an important factor in view to speedier response to new trends and customer requirements.

Unfortunately the study does not entail details on the textile industry, but TextileFuture voices the opinion that the findings of the study might as well apply to the textile relevant industries.

What makes the USA highly attractive?

There seems to be a need to cut transportation and energy costs in order to protect the supply chain. The bull market in energy commodities over the last decade has contributed to a major increase in transportation costs for manufacturers with global supply chains. This is reflected by the parabolic rise in crude oil spot prices, as well as the prices for refined derivatives such as diesel (trucking, rail) and jet fuel (air). Manufactured goods with lower value-to-weight ratios are generally less able to absorb the higher transportations costs related to manufacturing overseas and shipping to the US. A production closer to a customer base could therefore be attractive, because apart from the mentioned costs it cuts down lead times (design changes can be implemented more quickly, especially in textiles and clothing, a good example is Inditex in Spain (Zara), still producing over 45 % in Spain or Portugal), as well as a reduction of the inventory levels, mitigate some currency risks (there H&M was beaten lately), and give more control over intellectual property.

Reduction of supply-chain disruption

Concerns over transportation costs are a key factor for companies to alter their supply chains and those might be translating in a reduction of supply-chain risk. The financial impact of supply chain disruptions over the last ten years for American Companies can be had from Table 2/Figure 5

2_pwc-us-manufacturing-resurgence-2-7 (zip)

The conclusion leads to the fact that these companies are experiencing more financial consequences due to recent natural disasters in Asia than in other parts of the world. Also the US had its share of supply chain events – remember New Orleans and the complete shutdown of two plants of Huntsman Corporation as an example in the (textile) chemical area – and this is why the findings of pwc strongly suggests the merits of geographically diversifying supply-chain risks and reinforcing the so called China plus 1” model as an example.

Technical progress will allow new energy sources. To take advantage of those, Dow Chemical is constructing an ethylene production plant in Texas to take advantage of more affordable feedstock.

The influence of currency trends

It is a given fact that the USD has depreciated over the last decade, and China’s currency has risen moderately, which narrows the cost gap between producing in the US and importing from China for domestic consumption. The decline of the USD (around 15 % against a basket of major currencies since 2000) helps to make the US a potentially lower cost location for exports to other countries. This is one contributing factor to strong growth in the export of goods since the end of the recession. The appreciation of the CNY relative to the USD seems likely to continue longer term as China’s economy becomes more mature and this should be in favour of US manufacturers.

The influence of relative wealth

As we all know, it is to be expected that the GDP General Domestic Product of China, developing Asia and other emerging markets will continue to grow at a faster pace than the US and Europe, but the disparity in wealth, measured by real GDP per capital is to persist in favour of the USA. This difference in the relative standard of living, as well as the size of the US market will support decisions to invest in new domestic production of goods targeted for US consumption. And there are already many foreign manufacturers investing into this perspective and because of lower wages they invest typically in Southern USA, but also such states are not likely to be immune from manufacturing labour inflation.

3_pwc-us-manufacturing-resurgence-2-7 (zip)Global manufacturers have a differing view

Especially global manufacturers in the clothing area follow a multi-region strategy and source for example in Asia. They are likely to keep production in that region to serve those local growing markets, consistent with the trend toward regionalisation of manufacturing for the largest global manufacturers. These might be also textile machinery manufacturers.

Middle class is rising in Asia and educational gaps are narrowing

We have already reported on the prospects of the rise of middle classes in China and India and that the level of education and training of the labour force in these countries is also increasing. According to pwc’s findings, the gap of the level of higher education and training has been narrowing between the USA and China in the last four years but America claims still a significant advantage, details can be had from Table 3/ Figure 12

Interestingly enough, there is a growing army of engineers in America as Table 4 / Figure 13 makes evident.

4_pwc-us-manufacturing-resurgence-2-7 (zip)It has also to be noted that China and India send the most students to the US, leading to a “reverse brain drain” when these students return to their home countries and home labour markets. Workforce training has also been commonly cited as a driver in recent manufacturer capital expenditure decisions on which American states to operate in, indicating that manufactures are keen to locate where there are vocational programs in place to develop skilled workers, such as machinists, craft workers and operators.

Other factors

The US credit market is showing signs of healing since the inception of the 2009 financial crisis. Commercial and industrial lending demand has recovered and credit standards came back from the extreme levels during the financial crisis, but now these are on the rise again. On the other hand, borrowing in china has become more difficult as we all know and there is also a tighter lending for exporters. The US might face a lower availability of credit in the future. A knock-off effect of tightening credit across major economies could lead manufacturers to shy away from maintaining longer supply chains due to the inherent risks to carry, including extra inventory tied up in transit, particularly in industries with shorter product cycles – such as textiles and clothing – or high spoilage. These facts could lead also to an increase of the advantages of a US based production for US destined consumption.

5_pwc-us-manufacturing-resurgence-3-10 (zip)Whereas China and the rest of the world have generally grown more competitive, the US has not become more attractive from a tax standpoint and there reforms are mandatory and seem to be under way, probably after the American elections in coming November. The comparison of tax rates between the US, China and globally can be had from Table 5 / Figure 15

Concluding thoughts

In comparison to some parts of Europe, the USA has still a large domestic textile production and a complementary clothing production, therefore the textile knowhow is still intact and some repatriation of production would be manageable. However the power of the customers in the USA, namely special retailers in the clothing field they are globally sourcing and up to now they did not voice comprehension to protect an American textile and clothing industry. When the textile lobbyists were presenting their case in Washington, usually the retailers were opposed. However, looking at all favourable facts cited in the pwc study and the changing globalised world, if the retailers would opt for more American textile products, then the chances would be given that at least some textile manufacturing would be homecoming, but only if the framework of US advantages are such, that they top the ones by manufacturing abroad and the package would have to include also tax incentives. It should not be forgotten that US labour ranks amongst the highest in the world and for textiles and clothing this remains a critical factor, even though its importance becomes less when considering other cost factors. Only the future will tell!

Tables 6 / Figure 9 and 7 / Figure 11 reflect labour and wage costs US/China

6_pwc-us-manufacturing-resurgence-3-10 (zip) 7_pwc-us-manufacturing-resurgence-3-10 (zip)

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