Market Watch

Offshoring is Now Onshoring

4th Quarter 2013 Hotline

Market Watch Southern Industrial Development

by Joe A. Hollingsworth, Jr.

For the last 20 years, the decline of American manufacturing has been accelerating. Manufacturing output accounted for 19% of the economy in 2000; and, as of 2012, it has hovered around 11%. However, in the last couple of years, that trend has reversed itself as manufacturing led the economy out of the recession and continues to show strong growth, especially in the context of weak overseas demand.

The overarching reason for this change is that US manufacturing is becoming competitive again against the developed world and approaching attractive comparison against the developing world. In a recent Boston Consulting Group study, the analysis concluded that, in five years, the cost of producing a good in China’s coastal cities will only be 10% to 15% cheaper compared with producing the same good in the U.S. as a whole. When one factors the risk of supply chain interruption (weather events, port strikes, terrorism, enhanced chance management miscalculation, et cetera), the calculus begins to shift towards domestic American manufacturing.

There are two primary drivers for this reduction in domestic production costs. First, fracking in the United States has lead to a dramatic decline in the cost of energy. American natural gas prices were one quarter of European prices in 2012; U.S. prices are now one fifth of Japanese natural gas prices. Dow Chemical recently referred specifically to lower energy prices as the reason their new plant will be located in the U.S.

The second factor in the resurgence of American manufacturing is the productivity of the American manufacturing worker. American manufacturing worker productivity growth has been the fastest in the whole of the industrialized world. Despite massive reductions in manufacturers’ labor forces, BCG estimates the dollar value of U.S. manufacturing output increased by over 30% from 1997 to 2008.

Both of these factors are leading many experts to believe that the United States is in the early phases of a manufacturing resurgence.

Mostly, this manufacturing rebound will derive from the United States attracting manufacturing operations from other developed countries. BCG estimates that the United States is now the cheapest developed economy in which to manufacture products. Second, as the cost gap narrows, fewer companies will seek to move production operations to China.

Thus, with America attracting more industry and losing fewer to overseas locations, the result is an upward trend in domestic manufacturing growth. Manufacturing growth in the United States will have a pronounced impact on industrial real estate. Manufacturers themselves need space but also the warehouses that accompany the movement of these goods to their retail outlets. The net impact will be positive as companies locating manufacturing facilities in America for export to foreign markets, which, if located elsewhere in the world, would bypass US industrial real estate altogether.