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China Seeks Low-Cost Production... in the United States

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In this two-part series, we'll look at the full-circle nature of outsourcing U.S. jobs, manufacturing, and consumer goods. The way things are looking right now, we may be on the receiving end of colonialism pretty soon.

Beware of what you wish for. For all of the "pollyannas" who have been rooting for manufacturing jobs returning to the good old U.S. of A. from low-cost countries such as China, they may just be getting their wish; but not in the way they intended. It will end badly.

In a perverse kind of irony, it appears that the United States may be evolving into a low-cost country, wooing China-based manufacturers to set up shop here -- at least in the textile and yarn industries -- which the U.S. lost to Asia and the Far East in the 70s and 80s.

In fact, several Chinese yarn and textile manufacturing businesses have already moved to the United States, primarily in the southern states where the manufacturing skills still reside and where most of those textile jobs were lost to lower-cost countries. The region also has state and local governments eager to boost their economies and decrease unemployment, and willing to provide significant tax breaks, bonds to defray project costs, grants, and job-development credits.

One such yarn manufacturer, Shanghai-based Keer Group, recently invested $218 million to build a factory in South Carolina. With energy costs lower than in China, and non-union labor costs low enough to be offset by the ability to ship yarn to manufacturers in Central America where finished garments can be sent back to the U.S. duty free, the total cost for yarn production is now less in the U.S. than in China. A kilogram of yarn spun in the U.S. in 2003 cost $2.86 vs. $2.76 in China. By 2010, the U.S. cost was $3.45 per kilogram vs. $4.13 in China.

While this is just one small example in one industry, it's a trend that is expected to continue.
And for those who would point to the fact that Chinese companies currently represent only a small percentage of total foreign direct investment in the U.S. (and to provide context regarding how small the Keer Group event is), it merely added one more Chinese company in the greater Charlotte area, bringing the total number to roughly 23. This is a fairly insignificant Chinese penetration, compared to about 920 companies from around the rest of the world establishing a footprint in the same area. German companies alone account for 189 of the total.

My reason for "raising the flag," so to speak, on China's moves (pun intended), is that China represents the biggest and most obvious country that stole U.S. jobs, particularly in the apparel/textile sectors, in the first place. And more significantly, it's my opinion that as China's economy and its culture continue such a rapid ascent up the "food chain," and the country becomes more consumption-driven, it will accelerate its acquisition of resources and assets around the world, quickly outpacing all other countries, the U.S. included. And the "low-hanging fruit" of the apparel/textile industry will likely be top priority for Chinese companies. So if you are looking for the light at the end of the tunnel to grow jobs in America, beware, because there's a train picking up speed coming right at you, and it's bearing a red flag with a bunch of yellow stars on it.

Not a Good Thing

So getting manufacturing back to the U.S. in this way is not a good thing. It confirms that while some emerging countries, primarily China, are moving up the proverbial food chain at a very rapid pace, it also means the U.S. may be pushed down the chain, as China either continues to acquire our assets or builds out their own on our soil. Yes, the U.S. will get manufacturing back, but those businesses will be owned by foreign companies. And while some of the profits will likely be invested in U.S. expansion, higher wages, and more employment, a substantial amount will end up back in foreign economies.

Remember how we justified outsourcing low-wage manufacturing jobs by declaring it would enable us to compete and grow at a higher value-adding level in the technology, science, and engineering sectors in an innovation culture? Sadly, there are now indications from our global educational rankings that our youngsters are showing less competence and, indeed less interest, in those higher-level pursuits; plus there are signs that as China rapidly converts its manufacturing-driven economy to a consumption-driven one, it might just beat us to the top of the food chain.

As China literally pushes its economy to make this conversion, it is simultaneously ramping up its standard of living, and along with it, raising wages. Thus, its once lowest-cost manufacturing base is eroding and losing share to other lower-cost countries. However, to offset these losses in certain industries, Chinese companies are either acquiring or building new manufacturing plants in the lower- cost countries, as well as acquiring existing companies around the world, to fuel its rising consumer economy.

In the U.S. alone, China invested about $14 billion in the food, energy and real estate sectors in 2013 (including about a $7 billion acquisition of the Smithfield food company), up from $1.3 billion in 2008.

Next time we'll look at how our own system has set up a Catch-22 for American manufacturing and business.

About Robin Lewis
Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women's Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. He is co-author of The New Rules of Retail (Palgrave Macmillan, 2010). In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.