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Why You Should Forget China And Invest In The US

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Reports of the demise of U.S. manufacturing have been greatly exaggerated.

Let’s start with the most obvious point – and the most shocking to anyone who has spent their time listening to pundits: The U.S. remains the largest manufacturer in the world.

That’s right, for all the talk of China eating our lunch, and outsourcing destroying America’s factories, we’re still number one. Granted, the lead is slim – the U.S. produces about 18.2% of the world’s factory output, while China is right behind us at 17.6% - but listening to business news, you’d think we’d shuttered our last factory 30 years ago. That simply isn’t the case. The U.S. still has the strongest manufacturing base in the world.

Fine, the skeptic says, but with current trajectories, we’ll be behind China soon enough. It was only a few years ago when we produced 22% of all manufactured goods, the surprisingly well-read skeptic continues, while China was producing half that. It may not have happened yet, but we ARE about to get left in the dust.

An understandable reading of the numbers – but entirely wrong.

Why China Is Going Down… And The U.S. Is Heading Up

For years, the outsourcing fad has swept through American industry. But, as detailed in a tremendous piece in The Atlantic by Charles Fishman, that trend is fast reversing. It’s being replaced by an insourcing boom.

That’s being fed by a number of factors, chief amongst them the death of cheap labor. Chinese workers still are paid much less than their American counterparts… but that’s fast changing. Chinese factory worker wages, already five times what they were in 2000, are rising 18% a year – enough to close the gap a good bit.

That, long-term, would be worrying. But when combined with the much higher efficiency of American factory workers – second only to the Japanese – the gap between labor costs closes to a very small gap.

Factor in the overall arc of rising transportation costs… the lower cost of energy in America to run a factory, as our natural gas boom gets underway… the greater need for quick turnarounds in the new internet age of ever-shrinking product cycles… and the higher quality of American goods, and making products onshore makes a lot of sense.

Then there are the hidden costs of outsourcing, well laid out by Fishman. By producing goods in China, it’s more or less impossible to protect intellectual property – hence the rise of cheap knock-offs, often produced by the same factories making original branded products.

An innocent screw-up also highlights the difficulty of doing business abroad. One bad shipment – or wrong shipment – can necessitate an airlift of the correct part, and one or two emergency 747 trips completely wipe out any cost savings achieved by making goods overseas.

Finally, there are skills we’ve lost by sending our manufacturing overseas – skills that inform the design process. Products designed in one place and built in another tend to be much less efficient – and also to become homogeneous, since all designers are grappling with the same problems.

Add it all up, and you’ve got a number of companies moving production back to America.

The New Trend In Manufacturing

In his article, Fishman profiles General Electric (NYSE: GE), which has moved a number of factory lines stateside, to its long-underutilized Appliance Park. Low-energy water heaters that once were made in China are now being made in the U.S. French-door fridges once made in Mexico have returned stateside. And, starting next year, dishwashers, front-loading washers and dryers all will be made stateside.

The hot-water heater has benefited from a reverse of what’s been called the high-tech “IKEA Syndrome” – the number of soldered parts have been reduced, also reducing the chances of having a bum product. The number of parts needed to make the heater has been reduced 20%, while the cost of materials has dropped 25%. The number of hours needed to make the heater went from ten in China to two in the U.S. – actually lowering labor costs. Taken altogether, the sticker price of the heater actually dropped 20% - because it’s being made in the U.S.

GE isn’t the only one jumping on this bandwagon. Apple (NASDAQ: AAPL) CEO Tim Cook has gone on a charm offensive recently showing how the company has moved some of its production lines to the U.S,, with consumers reporting iMacs that say ‘Assembled in the USA’ instead of the usual ‘Made in China.’

Components are also coming home, with the glass used in Apple products made in Kentucky, and the dishwasher racks used in GE products made in Appliance Park.

The fact is, the best designers and factory workers in the world still reside in the developed world – and when you bring them together, you increase innovation, lower costs, and increase speed. Companies like GE and Apple that recognize and act on this knowledge are ahead of the game.

Of course, that applies for complex high-tech parts, but simple goods probably aren’t coming home. There’s only so many ways to pour plastic into a mold to make toy soldiers or cheaper nuts, for instance. Making those simple parts abroad still makes sense.

But China faces a threat there too.

A New Way Of Producing Goods

We’re on the cusp of a shift in manufacturing The Economist has called The Next Industrial Revolution. It’s 3D printing, and it’s about to cut the legs out from under the low-end manufacturing industry.

In short, innovative companies like 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) are now coming out with 3D printers which will allow consumers to make low-end manufactured goods at home, cheaper than from a factory, and custom-made to their own specs.

The printers are already affordable, and will only become moreso. Indeed, some DIY printers come with instructions on how to print out future printers!

It won’t happen overnight, but 3D printing is going to change the game for manufacturers. Only exotic materials and high-tech gadgets will even need factories within a decade or so.

That means China is getting squeezed on both sides – it can’t produce high-end goods as well as we can in the States, and it is going to see the market for low-end goods shrink in near-future as well.

Many patriotic economists have wondered what will happen to the world when a plutocratic country like China takes the lead. A better question is, how will developed nations lead when cheap-labor countries like China falter over the coming years?

Letsryan has a position in General Electric. The Motley Fool owns shares of Apple, 3D Systems, General Electric Company, and Stratasys and has the following options: short JAN 2014 $55.00 calls on 3D Systems and short JAN 2014 $30.00 puts on 3D Systems. Motley Fool newsletter services recommend Apple, 3D Systems, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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