The attractiveness of the US as a point of production has been an important point we have emphasized over the past several years. Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange (2009) anticipated and spent some time explaining why this was likely.
Subsequently there have been numerous corporate announcements of locating plant and production in the U.S. Some of it has been on-shoring, by U.S. companies. Some has been foreign companies bringing production to the U.S.
News at the end of last week suggest this trend is still very much alive. Foxconn Technology Group (OTC:FXCOF), the flagship company of Taiwan's Hon Hai (OTC:HNHAF) announced plans to invest $40 mln in Pennsylvania. This is notable as well because much of the new manufacturing operations are located in the south part of the U.S., where labor costs and taxes are often less.
About three-quarters of the investment will go to building a high-tech factory for components for telecom equipment and internet servers in Harrisburg. The company plans on creating about 500 jobs on top of the 30 employees it currently has in that city. The remaining quarter will finance a R&D operation at Carnegie Mellon University. A year ago Foxconn indicated it was preparing to expand its North American operations, partly responding to customer request that more of their products be domestically produced.
Separately, a report in the Financial Times today cites research by the U.K.'s government's Manufacturing Advisory Service, that found that one in six British manufacturer has brought production back onshore or are doing so. The survey of over 500 small and medium size firms found that the on-shoring is outstripping off-shorting by a magnitude of almost 4-to-1. The three most common reasons for the change were cost-savings (26%), improving quality (20%) and reducing the lead times (18%).
It appears that labor costs in particular are not the key factor that they might have been in the past. On one hand, the combination of higher wages and higher inflation in China erodes its competitive advantage. On the other hand, the secular rise in productivity means it takes less labor to produce goods. This reduces the share of labor costs in the total cost of production. Many businesses seem to perceive they have more control over labor than other input costs such as raw materials or the cost of capital. Therefore they often focus there for savings.
Ironically, the on-shoring movement reverses the internationalization of production that was a distinguishing feature and driver of the post-World War globalization. It is coinciding with the return of the home bias in some spheres of the finance, especially in Europe.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)
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