September 24, 2019

An International Trade Commission report identified an uptick in domestic manufacturing, concluding that “sourcing domestically may be competitive for some products.”

It’s a mixed bag for those participating in Manufacturing Day next Friday, October 4th. According to a recent report from the U.S. International Trade Commission there is evidence that domestic investments in textile and apparel manufacturing have increased thanks to decreasing manufacturing costs in the United States.

The reason for this uptick are two: lower energy prices and increased automation. It’s a mixed bag because there is no telling where energy prices will go—and increased automation, although highlighting technological changes in manufacturing, has also been accompanied by decreased employment in textile and apparel manufacturing in the U.S.

Last month, we analyzed the phenomenon of global manufacturers diversifying away from China. In most cases, that activity shifted to other low-cost countries in Asia, and not to the United States, leading to the conclusion that, despite the current convulsions, China is likely to remain a major manufacturing center for years to come.

Rising labor costs in China are the main long-term reason companies are reassessing their sourcing strategies. But lower U.S. energy costs—made possible by massive shale oil and natural gas development—is making manufacturing stateside more attractive, according to the ITC report. It’s not as if U.S. manufacturing costs will sink below China’s, but lower energy costs may serve to level the playing field somewhat.

“While the cost of U.S. production is still significantly higher than that of China, when combined with other factors, sourcing domestically may be competitive for some products,” said the report.

This phenomenon is particularly visible in the Southeast, according to the report, where manufacturers can save over 50 percent on the cost of electric power compared to China, over 40 percent compared to South Korea, and close to 40 percent compared to India. That means that, according to the report, “despite significantly higher labor costs in the United States, the total cost to spin one kilogram of cotton yarn in the United States was lower than that for” those other three countries.

Investing in more efficient machinery and in automation have also served to level the playing field between the U.S. and lower-wage manufacturing locations. “U.S. firms have been able to reduce costs by incorporating automation into traditionally labor-intensive tasks such as quality control, especially in fabric inspection, and other non-value added areas, including basic packaging, material handling, and inventory tracking,” said the report.

Data from the American Apparel & Footwear Association (AAFA) show that capital expenditures in plants and equipment for the textile and apparel sectors have increased. Between 2013 and 2016, the latest year for which data are available, they rose by 36 percent in the textile sector and were up five percent for the U.S. apparel industry. AAFA estimates that the domestic industry produced 3.0 percent of total apparel consumed in the U.S. in 2018, up from 2.0 percent in 2010.

There are other reasons, as well, for believing that changes in sourcing strategies might bring more production closer to home. A recent McKinsey report noted that “fast fashion, which depends on short lead times, will need to find new strategies to maintain delivery speed and production quality…” That suggests the increased near-shoring and on-shoring could be in the offing.

So it’s an uptick, and not a massive migration of production capacity. And that uptick is not reflected in employment numbers, the USITC report noted. Employment in the apparel sector declined between 2013 and 2017 by 21 percent, a loss of 25,000 jobs, supporting the contention that automation is making a major contribution to the attractiveness of the U.S. as a textile and apparel manufacturing venue.

As we’ve said, it’s a mixed bag—so there’s no cause for full-on celebration. U.S. energy discoveries have contributed to lower global prices, but domestic energy prices are subject to trends in the global marketplace—which, in turn, can be held hostage to developments in an increasingly unstable geopolitical landscape. Oil prices are 30 percent lower than they were less than a year ago, but 22 percent higher than they were at the beginning of the year. Natural gas prices are low right now but arguably have shown even greater volatility.

Instability—also fueled by ill-conceived policies such as trade tariffs—breeds uncertainty, and uncertainty is the biggest deterrent to growth and investment. Could that uncertainty motivate some companies to invest more domestically? Time will tell.

Peter Buxbaum, a columnist for Industry Today, is an experienced author of articles on business, technology, international trade, transportation, security, and legal issues. His work has appeared in Fortune, Chief Executive, Jane’s Defence Weekly and  Computerworld.

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