Consider this: In 2010, Intel Corp. announced plans to invest between $6 billion and $8 billion in factory upgrades and a new plant; Samsung has budgeted $3.6 billion in plant expansion; and Chrysler, General Motors, Nissan and Volkswagen plan to make similar investments that collectively will top $6 billion.
Businesses announce new investments on a regular basis. So what’s surprising about these? All are for manufacturing facilities in North America.
In the past, the North American region—the United States, Canada and Mexico—steadily lost manufacturing capacity to lower-labor-cost countries, from Brazil to China to India and beyond. In the last decade, the United States alone lost roughly 5 million manufacturing jobs as industries uprooted entire value chains in this exodus.
But the tide is turning. North America is undergoing something of an industrial renaissance—driven by productivity improvements due in part to the increased use of robotics, a narrowing wage gap with China and India, and lower natural gas prices in Canada and the United States.
To be sure, many of the commodity-focused, mass-production sectors—consumer electronics device assembly, for example, or high-volume apparel manufacture—won’t be part of this revival. However, executives in a number of high-value-added industries, such as chemicals and automobile production, are seeing compelling reasons to make products in the region again that trump trying to capture the lowest labor costs.
While the low wages and rapidly growing markets of key emerging economies have attracted producers worldwide, global competitive dynamics are changing. Many formerly red-hot internal markets, from mobile phones in India to passenger cars in China, are beginning to show signs of cooling off as they become more mature. Meanwhile, the rock-bottom labor rates these nations offer are in some cases climbing faster than those in developed markets, making them less attractive to foreign direct investment.
For example, while foreign direct investment in new assets in a variety of top sectors, including chemicals and electronics in China, fell by roughly 40 percent from 2003 to 2011, US FDI spending in those industries jumped significantly during the same period.
|This doesn’t mean the new emerging-market powerhouses and North America will trade places anytime soon in terms of their shares of world manufacturing output. China, for example, will continue to outpace the rest of the world dramatically in capacity expansion. Nonetheless, North America is expected to maintain its share of global manufacturing output while the share for other developed regions and countries, such as Western Europe and Japan, should remain flat or decline.
Evidence of this revival can be seen in new downstream manufacturing investments announced since 2009 in a variety of high-value industries, including automobile final assembly. Accenture research shows that nearly $1.5 trillion in new investments are expected in the region from 2012 through 2016. That’s roughly $300 billion a year, topping the record-setting total of the most recent up-cycle, 2006.
This renewed spending should propel investments in North American industrial manufacturing capacity from a projected 26 percent of the global total in 2012 to 28 percent in 2016. While Western Europe’s spending is also expected to rise during the same period, its share of new investments is expected to fall significantly—evidence that North America’s growth represents a real competitive shift.
|Major new investments
The key industries behind this revival tend to be those coveted by nations worldwide for the value they create and the quality of the jobs they deliver. In the United States, for example, nearly half of the 2012-2016 investments announced so far come in the energy industry, with metals and minerals, automotive, chemicals, electronics, and pharmaceuticals and biotechnology also figuring prominently (see chart). Many of these sectors already appear to have turned a corner, as trade balances in motor vehicles and parts, fabricated metal production, machinery, and electrical products and appliances continue to stabilize or improve in North America.
A number of converging trends are driving this renewal in North American manufacturing.
1. Close to you
Many high-value-added manufacturers increasingly recognize the need to be close to customers. Given today’s abrupt business cycle shifts, production pipelines that stretch halfway around the world can quickly become clogged with products no one really wants, especially in industries whose products elicit a high emotional response from consumers.
Japanese carmakers, for example, have long understood the need to locate plants in the markets they’re serving. While for years, US and European carmakers focused mainly on domestic markets, the Japanese knew that the future was about exporting their products. They soon took the next step by building plants in those countries.
It makes sense, given the whipsaw nature of economic cycles today. Carmakers know that even a relatively small spike in gasoline prices can instantly and profoundly change consumer car-buying behaviors. And a long line of ships steaming toward the market loaded with gas-guzzling sport utility vehicles could mean serious trouble. In fact, the continued growth in North American auto-motive capacity has been powered in large part by the establishment of transplant facilities by foreign producers. To cite just one recent example: In 2011, Volkswagen Group of America opened a billion-dollar vehicle assembly plant with an annual capacity of 150,000 units in Chattanooga, Tennessee.
Building where you sell also allows you to tie product development more closely to production, enabling companies to stay closer to customer needs and to react to quality problems far more rapidly than would be possible with a contract manufacturer on a different continent. A number of industries beyond the automotive sector also appear to value the immediacy of producing locally.
NEUTEX Advanced Energy, a maker of light-emitting diode (LED) lights, actually shut down its production lines in China in 2011 and is shifting production to Houston. Master Lock Co., which moved about a thousand jobs overseas in the 1990s, has slowly begun to repatriate them to America.
NCR Corp. has also jumped on the build-them-where-you-sell-them bandwagon, relocating production of its automated teller machines destined for North America from China, India, Brazil and Hungary to a new plant in Columbus, Georgia. In the electronics industry, a new business strategy is emerging—components are built in the market where they will be used, unless there is a compelling reason to go offshore (see Sidebar 1).
2. Waging advantages
While developed markets face a significant disadvantage in labor costs compared with China and India—hourly wages in the United States averaged nearly $26 in 2010, while China’s were $1.80 and India’s $2.70—trends point to a reduction in this gap going forward.
|Take the United States as an example. Its relative unit labor costs have been on a downward trend in relation to those of its main trading partners for more than a decade, and we expect those costs to increase at less than half a percentage point a year from 2011 to 2016. These costs in China during the same period are projected to grow strongly, rising 8.3 percent annually, while India’s will grow a projected 2.4 percent per year. Relative unit labor costs in Canada and Mexico will experience slower growth than their primary overseas trading partners through 2016.
But labor costs alone aren’t the whole story. Automation and robotics are playing a key role as well. Productivity has continually outpaced wage growth in the United States, for example, for well over a decade, making it increasingly competitive globally. A significant portion of this increase in manufacturing industries results from the introduction of plant automation.
Despite already being ahead in factory automation, increases in the use of robots among US manufacturers from 2007 to 2010 were on par with the growth in robot use seen in developing countries like China and India, and outstripped the advances in other developed markets.
This general trend is repeated in all of the key revival industries, from automotive to chemicals to electronics to food and beverages.
Furthermore, automation industry leaders suggest that, the alleged wage advantage notwithstanding, robots in North America can be more cost-efficient than human workers in developing nations. Members of the US robotics industry make the economic case for investing in robotics in North America instead of moving offshore: The operating cost of a small to midsize robot is about 15 cents an hour, while the going labor rates range from $1.80 to $3.90 an hour in many developing economies.
What’s more, it is estimated that a robot can replace as many as nine full-time employees on three shifts in simple electronics component assembly operations, with an expected payback period of about two years.
3. Cheap gas
In the United States, industrial manufacturing accounts for nearly a third of total end-use energy consumption. Sectors with the largest appetites for energy tend to be basic industries that produce chemicals, paper and primary metals.
North America enjoys a clear advantage over Brazil, China, India and many other countries in natural gas prices. Since gas is not as easily traded internationally as, say, oil and coal, its prices are more regional in nature and the North America surplus position has driven down prices.
For example, in 2011, gas prices (after carbon taxes) in India were almost 85 percent higher than those in the United States, while Brazil’s and China’s were roughly 50 percent and 40 percent greater, respectively. And Canada’s prices are even lower than those in the United States. The region’s natural gas advantage, which results from the growing exploitation of its unconventional resource base (shale gas, for example), is driving down prices significantly.
Natural gas accounts for between 24 percent and 30 percent of total energy consumption in North America. India and China, on the other hand, primarily use coal and oil to meet their energy needs, and natural gas accounts for only 7 percent and 3 percent, respectively, of their total energy use. Brazil largely depends on oil and other liquid fuels (almost 40 percent of its total energy consumption).
What’s more, oil prices have been at very high levels over the past few years, and coal prices have been rising. US natural gas prices, on the other hand, have been relatively low since 2009 and are expected to grow only modestly during the next few years.
While virtually all industrial players will profit from North America’s cheap natural gas, chemicals producers, which depend on gas both as a fuel and for the raw material used in petrochemical processing plants (i.e., “feedstock”), should benefit the most (see Sidebar 2). In fact, many petrochemical producers have already signaled their intentions to increase capacity.
Some sources indicate that low-cost shale gas could boost US ethylene production—a core petrochemical feedstock—almost 30 percent by 2017. And if gas prices fall far enough, they could also slow or perhaps even halt the continued regional retreat of the aluminum industry, which also depends on the fuel.
China’s coal-based energy won’t be a significant source of chemical feedstock until coal-to-liquids or coal-to-MTO (methanol to olefins) plants are further developed. Coal does, however, provide China with a low-cost source of energy, but inefficient utility plants and the pollution created by the country’s high-sulfur coal raise concerns over its use.
Beyond market immediacy, wages and energy, North America has other advantages that we believe will continue to attract new manufacturing investment.
Industrial infrastructure. Manufacturers rely on networks of tool and die makers, specialized equipment producers and other companies with deep expertise in the industrial arts. Compared to developed economies like the United States and Canada, such infrastructure is largely missing in much of the emerging world, even in the most advanced economies. As a result, manufacturers will have to build these networks themselves, which, considering the growing costs, could turn into a decades-long challenge.
Supplier base. The United States has a top-notch supply base, one well accustomed to delivering world-class quality levels on time and at agreed-upon prices. Many local suppliers in emerging markets, on the other hand, continue to exhibit wide gaps in their overall performance that could take a long time to overcome.
|The trend toward shrinking supply lines could also play a role in this shift. For example, 61 percent of respondents to a recent Accenture survey of nearly 290 manufacturing executives across a variety of industries said they were considering moving their sources of supply closer to end markets either by on-shoring or near-shoring manufacturing and supply.
Business risk. The United States and Canada offer manufacturers a largely risk-free business environment. While some developing countries are emerging as global economic powerhouses, they usually lag significantly behind developed nations in providing an overall favorable business environment.
For example, the United States and Canada enjoy fundamentally stable political situations, mature tax and legal systems, and excellent operational environments. In some emerging markets, on the other hand, widespread corruption, crime and inflation are often commonplace. Tax and legal systems can be arcane, pollution levels are often severe and labor conflicts can be recurring challenges.
Intellectual property. Developed markets like the United States and Canada have firmly established intellectual property rights and safeguards, while emerging markets are struggling to play catch-up in this area.
The threat of counterfeiting and other intellectual property theft weighs more heavily on US companies than others for one critical reason. Our analysis of patent citations reveals major differences between patents filed in the United States and virtually every other nation. US patents tend to focus on cutting-edge technology—to a greater extent, in fact, than those filed in Europe or Japan.
The higher commercialization potential of US patents increases the IP risks associated with keeping production in emerging markets, and can undermine the long-term security of the enterprise.
Logistics. The United States and Canada have world-class logistics capabilities, while those in emerging markets tend to be works in progress. America’s freight railroad network, for example, leads the world in terms of miles of track, traffic volume, productivity and affordability. What’s more, in the past 30 years, freight railroads have reinvested roughly $480 billion of their own funds in building and maintaining infrastructure. North America also benefits from an efficient and well-established trucking industry, where, except for fuel, costs have remained low and stable.
The World Bank, on the other hand, estimates that Latin America’s logistics costs as a percent of GDP are more than double those in the United States, and other sources put China’s logistics costs in a similar range. Challenges in emerging markets often include a lack of modern logistics facilities and warehousing space, relatively few third-party logistics providers and overcrowded transportation infrastructure.
The gold rush mentality surrounding emerging markets could be masking significant new manufacturing opportunities for North American industrial manufacturers. But before breaking ground for new facilities, leaders need to determine whether investing in new capacity makes sense given their specific circumstances. If so, the road ahead will require them to decide where and how to place assets and resources in North America in order to reap the biggest possible benefits.
Since the revival is linked mainly to higher-value-added industrial segments, manufacturers of chemicals, metals and other materials that hope to serve these businesses must also provide value-added inputs. As a result, they need to emphasize service and innovation in products and processes. While this may not translate into huge production volumes, the resulting revenues and profits are likely to be high in North America.
This revival clearly won’t be for everyone, but companies that do hear the call could rediscover just how competitive North America can be for manufacturers.
For further reading
“Finding growth off the curve,” Outlook 2012, No. 2
Sidebar 1 | Preparing for the rising manufacturing market
The manufacturing industries returning to North America are among the most demanding in terms of product innovation, customer service, supply chain connectedness and cost.
Accenture’s conversations with dozens of electronics component manufacturers reveal that some industry segments are beginning to “re-shore,” others are near-shoring (mainly in Mexico), while still others have chosen to stay offshore. Other segments, including those producing high-volume products such as smartphones, are unlikely to return.
However, a new business strategy is emerging based on the need to build in the market where the component will be used, unless there is a compelling reason to offshore.
The segments that are selecting North America as a manufacturing base include high technology (in part because of concerns about intellectual property rights) as well as mid-volume (some forms of medical equipment, for example, and aerospace) and military applications. Materials technology has emerged as a leading innovation driver in the industry, which is focused on developing lightweight/high-strength mobility devices, touch-sensitive screens, fingerprint-resistant enclosures, miniaturized components and many other features.
To serve the electronics industry in North America, suppliers must offer strong R&D capability, close customer and equipment manufacturer connections, reliable customer support and service, and low-cost supply chains. Critically, companies must also stay on top of customer trends to understand where the next breakthrough products will be manufactured. (Back to story.)
Sidebar 2 | The shale-gas catalyst: Impact on the chemicals industry
While several industries have compelling reasons for relocating manufacturing capacity to North America, the benefits of doing so for chemicals industry players stand apart. The reason? Cheap natural gas.
|The chemicals industry uses significant amounts for natural gas both as a feedstock—a raw material used in the petrochemical production process—and as a fuel. Natural gas makes up about three-quarters of the energy used by the industry in the United States, excluding the pharmaceuticals sector. And overall, aside from the energy industry itself, chemicals producers have by far the highest energy intensity among manufacturers, dwarfing paper, primary metals, and plastics and rubber productsl (see chart).
Based on the current trajectory of low and stable gas prices, the US chemicals industry is once again globally competitive. It is now in a position not only to supply an increasing share of domestic consumption but also to reassert a strong position in global export markets.
As a consequence, local chemicals producers have been reemphasizing US production while many foreign ones are busy planning new North American transplant facilities. For example, Chevron Phillips Chemical Co., Shell Chemicals, Formosa Plastics Corp. and the Dow Chemical Co. are all building plants in the United States, and other North American producers are considering expanding their current facilities. Meanwhile, South Africa’s Sasol is completing a feasibility study for a $3.5 billion to $4.5 billion plant in Louisiana, and chemicals players from the Middle East and South America are also considering US plants. (Back to story.)
About the authors
Paul Bjacek, a senior manager in Accenture Research, leads global chemicals and natural resources research. He is based in Houston.
Larry Oglesby, is an Atlanta-based senior executive in Accenture Strategy.