For more than a decade, deciding where to build a manufacturing plant to supply the world was simple for many companies. With its seemingly limitless supply of low-cost labor and an enormous, rapidly developing domestic market, an artificially low currency, and significant government incentives to attract foreign investment, China was the clear choice. Now, however, a combination of economic forces is fast eroding China's cost advantage as an export platform for the North American market. Meanwhile, the U.S., with an increasingly flexible workforce and a resilient corporate sector, is becoming more attractive as a place to manufacture many goods consumed on this continent
US households are now reeling under the chaotic pressures of post bubble financial wreckage, diverting their income towards paying down debt and replenishing their savings (instead of spending). This unprecedented cutback of spending by American consumers has turned the tables on the dynamics of the U.S. economy inside out. It should be noted that personal consumption accounts for around 70% of the U.S. GDP component and is hardly growing with doubtful growth prospects in the near future as well. This puts enormous burden on the remaining 30% for the U.S. economy to regenerate the much needed recovery. I have written about this in my previous article "How America's Other 30% Could Boost GDP Growth"
Going forward, Capital spending and exports (24% of GDP) could turn out to be the two major factors that could be decisive in bringing about a significant shift in the US growth model. This might need a fundamental rebalancing - moving away from excessive dependence on internally generated demand to drawing greater support from external sources. This should start with capital spending to armor US business with capacity, technology and private infrastructure and capture market share at home and in foreign countries.
Change is underway: The early evidence of such a shift is mounting.
- Electrolux (ELUXF.PK) shut down its unionized kitchen appliance plant in Quebec, Canada in 2010 to build one in Memphis.
- Chrysler plans to add about 1,100 workers in its Jefferson North Assembly Plant to build its new Jeep Grand Cherokee
- GE (GE) plans to move 800 jobs back from Mexico to the United States
- Jacobs Engineering (JEC) was awarded a $1b contract for a pipe manufacturing plant in Texas
- Whirlpool (WHR) brought back production of its KitchenAid hand mixers to its Greenville facility made by a contractor in Huizhou, China for 6 year to it
- Rolls-Royce (RYCEY.PK) is build advanced manufacturing facility in Indianapolis, creating more than 100 new jobs
- Otis Elevator (UTX) is moving production from its factory in Nogales, Mexico, to a new plant in South Carolina
- Caterpillar (CAT) is planning to build a hydraulic excavator manufacturing facility in Victoria, Texas, that will employ more than 500 workers
- Siemens (SI) closed its Ontario plant, moving production to U.S. for lower labor cost
- Starbucks (SBUX) tapped a US factory, not China, to make its coffee mugs
- Toyota (TOYOF.PK) to move production of Highlander to Indiana for export
- NCR (NCR) moved production of its ATMs to a plant in Columbus, Georgia, that will employ 870 people by 2014.
- The Coleman Company is moving production of its 16-quart wheeled plastic cooler from China to Wichita, Kansas
- Ford (F) is bringing up to 2,000 jobs back to the U.S. in the wake of a favorable agreement with the United Auto Workers that allows the company to hire new workers at $14 per hour.
- Sleek Audio has moved production of its high-end headphones from Chinese suppliers to its plant in Manatee County, Florida.
- Peerless Industries will consolidate all manufacturing of audio-visual mounting systems in Illinois, moving work from China in order to achieve cost efficiencies, shorter lead times, and local control over manufacturing processes.
- Outdoor Greatroom Company moved production of its fire pits and some outdoor shelters from China to the U.S., citing the inconvenience of having to book orders from Chinese contractors nine months in advance.
- Ashland (ASH), a specialty chemical company, plans to invest $39 million to expand its Hopewell, Va., plant after having considered investments in China and Europe.
- Procter & Gamble (PG) held the grand opening of it 600,000-square-foot Box Elder Family Care plant in Utah with approximately 200 employees-the first plant it has built in the U.S. in 40 years. Charmin toilet paper is rolling off the line there.
- In auto, machinery and tire production, Nissan (NSANF.PK), BMW, Maserat, Kia Motors, Michelin (MGDDF.PK) and Continental Tire have all announced plant investments.
- In Ohio, a series of investments are being made in steel production to support the shale gas industry, involving US Steel (X), Vallourec & Mannesmann and Timken (TKR).
- Chemicals expansions are occurring across the country due to competitively low input prices. Expansions or new plants have been announced by Dow (DOW), Chevron Phillips Chemical, Sasol (SSL), Methanex (MEOH), TPC Group (TPCG) and Shell (RDS.A).
- Global Foundries is building a semiconductor manufacturing facility in Malta, N.Y.
- Watts Water (WTS), a manufacturer of plumbing components is expanding a New Hampshire plant to bring production back from China.
Investment Options from Multiplier effect: U.S. and non-U.S. companies are likely to open manufacturing facilities in the U.S., driving manufacturing job growth, which is particularly positive for the American labor force due to the employment multiplier associated with manufacturing activity. For every manufacturing job created, one to two jobs are created in other industries. According to a supply-and-demand framework for labor, job creation should allow for better wage growth than recently experienced.
Growth in manufacturing production in the U.S. could increase the size of industrial markets, which could lead to positive operating leverage and therefore improved profitability and returns on capital for suppliers. Potential winners include small and midsized U.S.-based suppliers to manufacturing, U.S.-focused industrial distributors and U.S.-focused automation companies.
- Inland Trucking companies: Manufacturing activity that occurs within North America could drive growth in U.S. freight volumes, because such activity tends to involve more intra-national movements as components are transported around the country. This could benefit trucking companies that move more onshore freight than imports, railroads that move raw materials and long-haul shipments, and suppliers to those industries. Truckers that could benefit from this trend include J.B. Hunt Transportation Services (JBHT), Landstar (LSTR) and C.H. Robinson (CHRW). Some rail firms such as Union Pacific (UNP) and CSX (CSX) can also be looked into.
- Lower natural gas prices could improve profitability and returns on capital of U.S. chemical companies, U.S. natural gas producers (provided they can capture some of the higher global prices through LNG or use of natural gas to displace oil as a transportation fuel), regulated electric utilities that may be able to earn regulated returns on new natural gas electricity plants, and unregulated electric utilities that generate electricity with highly efficient natural-gas-powered plants. Top picks to play this trend include Range Resources (RRC), Chesapeake (CHK), Encana (ECA), Devon (DVN), Anadarko (APC), Apache (APA), Marathon Oil (MRO), EOG Resouces (EOG), ConocoPhillips (COP) & SandRidge (SD)
- The benefits of more U.S. manufacturing production, higher manufacturing employment and lower natural gas prices are likely to be found in pockets of regional strength. This could create opportunity for small regional retailers, which may see higher sales and improved profitability; regional banks (KRE), which may see lower losses and better loan growth; construction companies, which may benefit from increased construction activity; and electric and other utilities, which may see accelerated demand growth. Major regional banking stocks include BB&T Corp (BBT), PNC Financial (PNC), Regions Financial (RF), Fifth Third (FITB), New York Community Bank (NYB) and US Bancorp (USB).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.