Reindustrialization of the US, so long China as the World’s factory
Posted in Finance Articles, Total Reads: 3162
, Published on 16 July 2013
After the presidential elections in 2012, the focus of US is to get back on the road to recovery. This path to recovery appears difficult because the economy faces a number of challenges. This write-up helps us to understand what key factors may support US economic growth in the forth coming years and will the US be able to make a comeback as a reindustrialized nation.
The following are determining factors of American reindustrialization process -
Lower labor costs
Highly skilled competitive work force
Lower energy costs from shale gas in southern areas
Growth in Texas as a economic powerhouse
Preparedness from localized production disruptions
Reduction in insolvencies
Manufacturingsector is one of the key sectors which contribute to 2/3 rd to the US economy. This key sector has been resilient in making a strong comeback although it was affected by crisis in the past. This statement is further supported by recent moves being undertaken by foreign companies along with American MNCs.
In January 2013, Lenovo had opened a new manufacturing facility in Whitsett, NC. Some of US companies like Caterpillar, GE and Ford have made announcements to shift some of the manufacturing back to their home country. This means that foreign companies have started to realize the numerous challenges they encounter if they move their facility outside the home country. Most of the economists and analysts believe that this marks the beginning of a new renaissance for US reindustrialization.
There are various other reasons for the above moves by American and Chinese companies. One of the major reasons could be stricter and tougher laws set by the Chinese government along with frequent labor disputes and strikes. Second reason is the appreciation of Chinese Yuan that has minimized the wages between the American workers and their Chinese counterparts. The gap in labor costs between American workers and Chinese workers was $17/hour in 2006. This cost would shrink as little as $7/hour between the American workers and their Chinese counterparts by 2015.
A competitive lower labor cost will automatically make companies rethink on moving their operations to US. American unit labor costs are relatively lower in the world. Analysts predict that by 2015, the manufacturing costs in the US would be lower than Europe and Japan. As a result, Nissan, Honda and Toyota are increasing their exports from the United States.
Energy factor has been the most favorable to the US in the reindustrialization process. There are two reasons to support the above statement. Firstly, oil prices have relatively been lower than global prices for 2 years by 15-20$ giving a major boost to the performance of US companies. Secondly, abundant reserves of shale gas in the southern states and as a result of increased production has triggered down the prices. This has resulted in providing American companies with access to cheap energy.
The plummeting of gas prices comes as a result of advancements in American innovation in drilling technologies. Companies have explored vast reserves of shale gas stretching from New York to West Virginia, North Dakota and Montana.
Unconventional gas reserves
Apart from shale gas, there are many other gas reserves that are yet to be tapped. An increased in unconventional gas activity will create more jobs, economic growth, investments, government revenue and last but not the least will lower prices. The US is set to witness an increase in production of unexplored gas reserves due to investments worth $ 3.2 trillion. Analysts forecast that $2.4 million jobs will be created by 2035 as a result of tapping this market. As a result of increased activities in this sector, unconventional activities will contribute $50 billion in federal, state and local royalty venue.
Many companies sees the US shale gas supply as a cash cow of the US because manufacturers get easy access to lower energy prices. A number of the companies will switch from oil to gas with suppliers switching from coal fired plants to gas fired plants. All these add to the competitiveness of the American economy in contrast with Japanese and European companies.
The sector that reaps maximum benefits from lower energy costs is chemical fertilizer industry and metal industry. In the fertilizer industry, cheaper feedstock supplies help the industry to remain competitive and profitable. Being a profitable industry because of cheaper energy, this sector can expect substantial investments so that the pace can be maintained with increased production. If these favorable conditions continue to exist in the forthcoming years, then chemical sector can gain a global foothold.
The Southern states of US enjoy higher productivity because of significantly lower unit costs, cheaper energy and compensation. Current activities like the expansion of Panama Canal in 2014 is most likely contribute to the economic activity in the region. At the moment, Los Angeles and Long Beach are the two ports at which most of the goods from Asia are unloaded. The expansion of the Panama Canal would serve as an alternative route and thereby it will also reduce the travel time in delivering goods. Hence an increase in overall imports and exports from this region will provide boost to the manufacturing facilities in the region. As a result, a lot of auto makers are looking forward to open their manufacturing units here.
Discussing about the growth rate of southern states compared to anywhere else in the US, this region has always outperformed the northern region in terms of GDP growth. Looking at the figures in 2011 one can say that the output from south has been twice as the US growth. Hence it is expected that this region continues to outperform.
To further support the above performance from southern states, overall employment rate have been doubled in the last 35 years. All the results from the region are attributed to low unit labor costs. Foreign auto makers have taken advantage of this lower labor costs in comparison to American companies like Ford, General Motors who have been affected by labor unions demanding rise in wages.
A major cornerstone in the reindustrialization process from southern states can be attributed to the development of necessary workforce skills with special emphasis on technical skills rather than the traditional 4 year school.
Texas: The Southern Powerhouse
The southern state of Texas comprised 8.8% of US GDP in 2011. It is the second largest economy after California. Forecasts state that Texas will outperform the US economy in job creation. One of the remarkable factors contributing to the stable economy of Texas State is its housing market which is often said to be resilient. The housing market boosts the entire American economy thereby supporting manufacturing industry indirectly.
Texas has been the leader in crude oil and natural gas along with significant contribution towards chemical production.
Preparedness from localized production disruptions
Awareness of operating vulnerability created by over-stretched supply chain is also one of deciding factors for reindustrialization. US have prepared themselves from localized production disruptions following natural disasters in Thailand (flooding) and Japan (tsunami)
(Source – Economic Outlook US, 2013)
Looking at the macroeconomic projections in the ‘Economic Outlook 2013’, it can be interpreted that all the above factors are suited for reindustrialization of the American economy.
Decreased insolvencies in various US key sectors play an important role in the whole reindustrialization process. A study conducted by ‘economic outlook 2013’ shows that in 2012 the insolvency was at 10% and in the current year it is 2013. This means that businesses operating in various sectors in the US can operate in a risk free environment and they can even survive the recession period.
In addition to all the above key points, steady growth in subsectors like agriculture, mining, medical equipment and petroleum industry contribute to the reindustrialization process.
There is no doubt that America is leading towards an overall reindustrialization. Factors like rising labor costs in China, appreciation of Chinese Yuan, skilled American work-force, lower energy prices, and preparedness for a natural disaster are some of the key factors that are favoring the overall reindustrialization process. However some factors that might restrain the reindustrialization process would be net imports/exports current fiscal and the current debt that American government owes to other nations.
As long as the American economy survives the challenges and turns them to be in their favor, no one can stop United States of America taking the crown of the current ‘world’s factory’ from China.
The article has been authored by Sanal Nair, University of South Wales.