Martin Hutchinson: Think U.S. jobs are destined to drain away to China (NYSE:FXI) forever? Think U.S. unemployment will grow and grow while cheap overseas labor supplants American workers? Think your children will be forced to work selling Big Macs to Chinese billionaires?
Well, boy has the Boston Consulting Group (BCG) got news for you.
The United States’ No. 1 strategic consultancy’s latest study shows 2 million to 3 million manufacturing jobs and about $100 billion in output can be expected to return to the United States from China by 2020.
That’s right. China, so often the scapegoat for U.S. joblessness – and an alleged “currency manipulator” – actually is becoming our best ally in the fight against high unemployment.
The BCG team says three things will bring millions of Chinese jobs back to America:
- Soaring Inflation. China’s annual inflation pulled back to 6.2% in August after hitting a three-year high in July. It’s rumored that the People’s Bank of China will allow the yuan to rise further to curb rising prices. A stronger currency will make the country’s exports and labor less competitive.
- Rising Wages. Chinese labor is steadily becoming better educated and more affluent. The central government is targeting an increase in minimum wages of 13% a year through 2015.
- And A Stronger Yuan. The yuan has risen about 30% against the dollar since 2005. Again, the great motivator here is not the saber rattling of U.S. politicians, but rather troubling levels of inflation that could spur civil unrest.
Made in the U.S.A. (Again)
Indeed, Chinese manufacturing, which had been much cheaper than U.S. manufacturing for the last decade or so, is suddenly less competitive in certain sectors.
This should come as a huge relief for Americans.
Modern telecommunications and the Internet revolution made it easier and cheaper than ever before to run a global supply chain. Consequently, U.S. manufacturing was priced out of the market.
We saw it first in cheap clothing – a highly labor-intensive industry where U.S. factories were already struggling.
The move to Chinese clothing sourcing, pushed into overdrive by Wal-Mart Stores Inc. (NYSE: WMT), brought immense cost benefits to U.S. consumers. In fact, the Bureau of Labor Statistics price index for apparel has declined by 15% in nominal terms since 1993, compared with a 50% increase in consumer prices as a whole.
U.S. Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan, helped this process along with their ultra soft money policies. We haven’t had much inflation because of the price declines brought by outsourcing, but for many years it has been exceptionally cheap to raise money for investment in emerging markets. China and other emerging markets already had a cost advantage in cheap labor, and the Fed’s loose monetary policies further encouraged outsourcing.
As a result, U.S. workers can now buy cheaper clothes from China through Wal-Mart, but are losing jobs and being forced to accept lower wages. And since Bernanke cannot be persuaded to reverse policy and raise interest rates, it was beginning to look as though U.S. jobs would drain away until American wages were at Chinese, or even African, levels.
However, the BCG report is a very welcome sign that this process could actually be coming to an end. Chinese wages have risen so much that U.S. labor is now competitive when its higher productivity and lower transport costs are taken into account.
Of course, there are alternatives to China. Mexico, for instance, had been losing out badly to China in the 2000s, but now it is highly competitive once again. That’s good news for the employment prospects in our southern neighbor.
Still, with a population of 1.4 billion, China’s supply of cheap labor seemed almost infinite, so it is good to know that we are at least starting to reach the bottom of the country’s labor supply.
According to BCG, the process of returning manufacturing to the United States will begin in earnest in roughly 2015, as Chinese wages and other costs continue to rise.
The seven industry groups most likely to return manufacturing to the U.S. are transportation goods, electrical appliances, furniture, plastics and rubber products, machinery, fabricated metal products and computers/electronics.
The tipping-point sectors account for about $2 trillion in U.S. consumption per year and about 70% of U.S. imports from China, valued at nearly $200 billion in 2009.
Other industries, such as apparel, will not quickly return. There, China itself is losing out to cheaper labor centers like Vietnam, and the industry remains labor-intensive enough that the U.S. is unlikely to regain competitiveness.
Four Profit Opportunities
In transportation, the latest Ford Motor Co. (NYSE:F) contract with the United Auto Workers (UAW) provides for 12,000 new jobs to be returned to U.S. manufacturing plants by 2015.
With its labor costs no longer hopelessly uncompetitive and a strong position worldwide, Ford should be well placed to benefit from the return of manufacturing jobs to the United States. And those manufacturing workers are more likely to buy Ford products than their effete, import-buying, white-collar coastal cousins!
With a price/earnings (P/E) ratio of 6, and with profits likely to trend upwards with the automobile cycle, Ford looks attractive.
As far as appliances go, Whirlpool Corp. (NYSE: WHR) is likely to be a major beneficiary of increased U.S. competitiveness because of its strong U.S. market position. Transportation costs play a major role in competitiveness for bulky goods like washing machines, so once U.S. labor costs regain competitiveness, the market proximity of U.S. factories gives the company a decisive advantage.
Furniture is another bulky product. It’s also an industry where deep knowledge of local tastes and trends is important, and it helps to have top quality sources of wood nearby – another problem for Chinese manufacturers.
Much of the U.S. furniture industry is privately held or part of a conglomerate, but two companies that might benefit are Ethan Allen Interiors Inc. (NYSE: ETH) and La-Z-Boy Inc. (NYSE: LZB). Both companies have market capitalizations around $430 million, but Ethan Allen is more expensive at 14-times earnings and 1.6-times book value. La-Z-Boy by comparison trades at 6.5-times earnings and just 1.1-times book value.
Of course, to me, there’s only one choice: La-Z-Boy products are particularly attractive to us overweight and idle baby boomers!
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
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