August 28, 2013
Some of the biggest gains in U.S. exports, caused by a widening U.S. production cost advantage over leading European nations and Japan, are likely to be seen in machinery and transportation equipment, according to a new report by The Boston Consulting Group (BCG), a Chicago-based global management consulting firm and adviser on business strategy.
The report, titled "Behind the American Export Surge: The U.S. as One of the Developed World's Lowest-Cost Manufacturers," updates and elaborates on BCG research released last September, in which the firm predicted that higher exports as well as reshoring from China and elsewhere could add 2.5 million to 5 million manufacturing and related service jobs by the end of this decade. That, in turn, could reduce the unemployment rate, currently 7.4 percent, by as much as 2 to 3 percentage points. The report's projections are based on an analysis of labor, energy, and logistics cost trends in the U.S., Germany, France, Italy, the U.K., and Japan, all of which are major exporters of manufactured goods.
"Over the past 40 years factory jobs of all kinds have migrated from high-cost to low-cost countries," said Harold L. Sirkin, a BCG senior partner and a co-author of the report. "Now, as the economics of global manufacturing changes, the pendulum is finally starting to swing back. In the years ahead it could be America's turn to be on the receiving end of production shifts, as more companies use the U.S. as a low-cost export platform."
Labor costs will be especially important sources of competitive advantage in U.S. manufacturing. Adjusted for productivity, U.S. labor costs are projected to be 15 to 35 percent lower than those of Western Europe and Japan by 2015 for many products. Only a decade ago, average productivity-adjusted factory labor costs were about 17 percent lower in the U.S. than in Europe, and only 3 percent lower in the U.S. than in Japan.
Cheap energy also will boost U.S. competitiveness in several industries. By 2015 prices for natural gas are projected to be 60 to 70 percent lower, and electricity is projected to be 40 to 70 percent cheaper in the U.S. than in Europe and Japan.
Compared with other developed economies, the U.S. is particularly well=positioned to increase exports in seven industrial categories, according to the report: machinery, transportation equipment, chemicals, petroleum and coal products, computer and electronic products, electrical equipment and appliances, and primary metals. These seven sectors account for roughly three-quarters of total global exports. The job gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail.
"It will take several more years for the full impact of improved U.S. competitiveness to translate into significantly more jobs and higher industrial output," said Michael Zinser, a BCG partner who leads the firm’s manufacturing practice in the Americas and a co-author of the report. "But we already are seeing early evidence. Foreign companies such as Toyota, Airbus, Yamaha, Siemens, and Rolls-Royce are starting to move more production to the U.S. for export around the world."
The firm projects that by 2015, the U.S. will gain $3 billion to $12 billion from Western Europe and Japan in exports of machinery, a broad category that includes everything from construction and industrial machinery to engines and air conditioners. The U.S. will have a manufacturing cost advantage in machinery of about 7 percent over Japan, 14 percent over Germany and France, and 15 percent over Italy. Labor costs will be the big differentiator.
The company projects that in that same time period, the U.S. will gain $3 billion to $9 billion in exports of transportation goods such as cars, trucks, buses, and aircraft from Western Europe and Japan. The U.S. will have an approximate 6 percent average cost advantage over Japan and an 11 percent advantage over Germany in this industrial category, primarily because of lower productivity-adjusted labor costs. China will still have an estimated average production cost advantage of about 6 percent in 2015 for transportation equipment, but it will likely make more economic sense for such products to be made in the U.S. if they are consumed in the U.S., when shipping and other costs are accounted for.
A copy of the report can be downloaded at www.bcgperspectives.com.