Hi, this is Jim Tompkins, the CEO and President of Tompkins International. I’m pleased to be here today to talk about a topic that, to tell you the truth, is kind of bugging me. There’s another article out that kind of follows up on the first article where people are, once again, talking about bringing manufacturing back to the United States from China.
There are several problems with this discussion and several problems with this supposed-to-be business analysis. It’s just very poorly done. I thought what I would do is just take a couple of minutes with you today and share a couple problems with this work and share with you a few facts on the subject, to let you know what I was thinking about.
In both the first paper that was published by these folks (and then has been highly, highly picked up by the press) and the second paper that just came out a week or so ago, they claim that the labor cost in the US and China will be converging.
They’re talking about net labor cost, and so they’re looking at labor cost and productivity between the US and China will be converging by 2015. In the second paper, they say there’s a tipping point that will occur upon this convergence, which is now 2017. I’m not sure if they’re talking about 2015 or 2017, but let me be really, really clear here: The labor rates in China for manufacturing and the labor rates net productivity – whatever you want to look at – will not be converging in 2015 or 2017, or anything like that. It’s simply not logical to see how that would evolve.
We need to take into consideration that productivity in China is growing, just as it is growing in the US. To think that productivity in the United States is going to flourish and our wages are going to be flat, but that the productivity in China and the wages will go up, and therefore there will be a convergence, is just plain nonsense. It is not going to happen.
Even if it did – let’s say for a moment that it did for some fate I don’t understand – the reality is, that would not result in manufacturing coming back from China to the US. If the labor rates in China and in the US converge, what we would find is the product or the products which are being made in China would be moved to another country which had low costs. Those costs are not just for labor but for total – not total landed cost – but total delivered cost, which is important. What we see here is an evolution which is called creative destruction, which is an economic principle that hasn’t been invented for this discussion. It is a discussion that began in the mid 1920s to look at the evolution of people leaving the farm and moving to cities and taking jobs in factories.
This is really interesting, because in the early 1911-1912 timeframe, there were scholarly journals that were written that said everyone in American by 1930 would be a farmer. We would be going hungry. They forgot to look at two things in that situation, and that was yield and productivity. So obviously, yield and productivity look place, and so people on the farm has gone from 70 percent of us to 1 percent of us, or less. People left the farm, they went to the factory, and then they left the factory in the US and went to the service industry. Why did they do that? Because it was more pay. It’s the increase in standard of living. If the labor rates in China and the US converge – what we would find – there are other places we would buy product from, and those other places would be able to get the product delivered better through the supply chain in the US than they would be by making the product in the US.
It is clear that large items will take up a lot of space or weight in a container very possibly could do some near shoring. So those could come back to Latin America. Also there’s a lot of labor in Africa and other parts of Asia where that manufacturing could go if the labor rates between the US and China were to converge.
The second point I would like to make is in this study they talk about how important labor rates are. In fact, let me read to you a couple sentences: It says, “The implications of the new manufacturing math for companies are likely to be profound. Companies that continue to treat China as the default, low-cost option for supplying US markets on the basis of wage rate alone could soon find themselves at a competitive disadvantage.”
To tell you the truth, I don’t know of any companies who have outsourced their manufacturing to China based on labor rates alone. It doesn’t make sense. No one would only look at labor rates, because obviously you have to look at productivity, you have to look at energy, the raw materials they’re making the product from, inventory, transit times, manufacturing close to the customer – it’s based on a whole series of factors that you would have to make the decision to outsource. In this regard, the article and I agree, in that labor is not that important of a factor. In fact, in manufacturing in the US, we all know – labor is 2 or 3 percent of the cost of manufacturing. It’s a relatively insignificant cost.
So you say, “Jim, why are you at arms with the paper when you and the article both say that labor is not the driver?” Well, it’s because as you read the paper further, what they say is, however, because the labor rates are converging and the labor rates in Europe are going up faster than they are in the US, what we’re doing is we’re approaching a tipping point where manufacturing will come back to the US.
No, excuse me, you just said in your own article that you shouldn’t base it on labor rates alone. So, now here we say it shouldn’t be based on labor rates alone; however, based on labor rates alone, we’re going to wind up with more exports to Europe and we’re going to bring manufacturing back from China to the US. It simply doesn’t make sense. I know of no one that had manufacturing leave the US based on labor rates alone, and I know of no one who’s going to bring it back based on labor rates alone.
What we really need to do is look at the total cost model to get the total delivery to the consumer in the US, and based on where that is, the best price for the best total delivered cost is what we should be doing, and what we have been doing.
The third thing in the article that bothered me is that they seem to take the position that US manufacturing is in trouble. However, in the article itself it says nearly 75 percent of what is consumed in the US is made in the US. If US manufacturing’s in so much trouble, why is it that 75 percent of the goods that are consumed in America are made in America?
I would suggest there’s another point that’s even more strong that needs to be made, and this is that the fact – and this comes from our own government – that if you look at goods and services, 88.5 percent of the goods and services consumed in the US are made in the US. 88.5 percent.
Then I would ask you – why are you so fixated on manufacturing coming back from China? Because only 2.7 percent of the goods and services consumed in the US are made in China. 2.7 percent. It’s not a big deal. The labor that has left the US is not labor that left because of labor costs. It is not coming back because there’s other places where it’s cheaper to be done. What we need to understand is that manufacturing in the US is doing quite well. The problem is because of productivity and yield, it is requiring fewer and fewer people to create a larger and larger portion of our gross domestic product.
This leads me to the fourth conclusion from the article that I think is really in trouble. The article concludes that in seven industries, there’s a tipping point that’s going to occur in the next decade. This tipping point is going to result in two to three million jobs coming back to the US from China. That’s just absolute nonsense. If you look at the productivity growth in those industries, even if I agreed that all of that manufacturing would come back to the US, we’re only going to be talking about half that number, given the productivity enhancements we’ll have – but then also, why would they come back to the US and not go to the place where we get the lowest total delivered costs?
What I think we have is confusion about where people are employed versus where the gross domestic product of the US comes from. The GDP in the US comes from agriculture and manufacturing. Those are critical industries here. Because of yield and productivity, not many people work there anymore.
One of the case studies you see mentioned all the time is a hot water heater plant that came back from China to Louisville, KY. They talk about what a wonderful case study this is. Let’s talk about this wonderful case study. What in fact that’s occurred is the US government and the Kentucky government had contributed substantial amount of money to bring those jobs back in the form of cash incentives to the company. The reason they did that is because these hot water heaters are going to be very good on energy conservation. That’s a good thing to have happen.
Let’s talk to the people who work in that factory and see what they think about bringing jobs back to America. What we find now, these people are paid an average of about $13 an hour. What they were paid before they left to go to China was $25 an hour. Let’s go to someone and say your father, your brother, your husband, your wife, your sister is now working for $13 an hour when they used to work for $25. Isn’t it great that we brought this manufacturing back?
I don’t think they’re going to feel so good about it. The reality is, there is no ‘back’ to come to. The people that want to work for those wages don’t exist anymore. The buildings that the factory goods used to be made in? Those are now condominiums and restaurants. They’ve been converted. The concept of bringing manufacturing back to the US is a broken concept.
Let’s talk about manufacturing. On May 16, 2012, there’s an article on the Wall Street Journal that says as a headline, “Don’t Look Now, but American Manufacturing is Rebounding – Death Reports Prove Exaggerated.” Let me read just a couple lines here. It says, “The United States is in a tepid recovery from a deep recession, but apparently no one has bothered to tell that to the American manufacturing people. Since early 2010, they have created 489,000 jobs and are struggling to fill nearly a quarter of a million more. Their output last year topped 1.84 billion. That’s 8 percent higher than the pre-recession peak. Even with an underwhelming 16,000 manufacturing jobs added last month, the business of making stuff is doing well – so well, that many economics see domestic manufacturing not as a lost cause, but as entering a Renaissance.”
The US is the most productive in the world. We’re the most innovation. We have the most increases in productivity and we’re driven by market forces. We protect our intellectual property, we are trustworthy, we have institutions which minimize corruption, and so the US manufacturing sector is doing a great job of contributing to our GDP. No, we’re not going to ever have manufacturing be 50 percent of all employment like it was in the 1950s, because creative destruction has moved those lower-paying jobs elsewhere, and is paying people more money to do higher-skill jobs here in the US. Unfortunately the press will pick up this article that talks about these tipping points in these seven industries, and China losing these manufacturing jobs to the US. Simply not true.
I hope you really think through this. I would appreciate your feedback. I am really clear in my mind that these types of articles do not contribute to the decision-making – they just confuse it.
Thanks a lot, I look forward to speaking to you all real soon.