Canada's TD Bank predicts rising China costs will mean more 'onshoring'

THE Toronto Dominion Bank (TD Bank) predicts more manufacturing may return to the United States and Canada in the coming years, because of rising costs in China.

Average Chinese manufacturing wages, he said, have increased from being 2.5 per cent of those in America to about 10 per cent today and will be 15 per cent by 2015, said TD Bank economist Michael Dolega.

"All-in wages in coastal areas of China specialising in computers and electronics and transportation equipment production may approach one-quarter of wages in southern US by 2015," wrote Mr Dolega.

"Onshoring is still in its infancy and largely limited to anecdotes. However, the scales are beginning to rebalance for some industries as global conditions evolve," he said.

Factors include rising Chinese labour costs, an appreciating Chinese currency, and other domestic advantages, including the boom in shale gas production, reports American Shipper.

"Additionally, an overarching theme of rising capital-intensity across the manufacturing sector continues to gradually erode the primary benefit of offshore-production," he said.

"After a decade of employment losses, the manufacturing sector has become a key driver of the recovery adding nearly half-million jobs since the January 2010 trough," Mr Dolega said.

"For some industries - such as computers and electronics and plastics and rubber - offshoring activity has slowed to a trickle, While labour-intensive early-offshored industries - including apparel and textiles - will stay or move further offshore. Furniture, while not very capital-intensive, has nonetheless made some onshoring inroads recently," he said.

Products such as petroleum, chemicals, primary metals, and food and beverage never really moved offshore in first place, but may "contribute to a manufacturing revival through improved competitiveness resulting in organic domestic- and export-led growth," Mr Dolega said.

Automation is also a factor. "Capital intensive industries may attempt to add capital to increase productivity. Already, some firms have announced plans to replace part of their Chinese workforce by robots over the next several years as wage hikes make automation increasingly affordable. But, this trend will only serve to make these industries less labour-intensive and thus diminish the benefits of producing offshore in the first place."

Land prices in parts of China are higher than what is available in the southern US. These factors together with currency shifts are "escalating made-in-China costs" and that "most estimates based on purchasing power parity peg the renminbi as undervalued. This should put pressure on China to allow continued appreciation of its currency against the greenback."

"The consensus is shipping rates are not going to stay at the levels they are at right now and that is one of the reasons potentially manufacturers will have to gauge how costs will increase in the future," he told American Shipper in an interview.

"Distant shipping routes increase the required size of a firm's inventories tying up valuable capital. This opportunity cost can be especially detrimental for firms that use credit to fund inventories and favours shorter supply chains," though he notes credit conditions have eased somewhat since the recession.