Ten years ago the United States had it made in China, literally and figuratively. Back then, manufacturing in China cost 25 to 30 percent less than it did in the U.S. But times are changing.
By 2015, outsourcing manufacturing to China will be just as costly as manufacturing in the U.S., that according to consulting firm AlixPartners. Wage inflation, exchange-rate pressures, and higher shipping costs are the driving forces behind the trend.
And while some manufacturers are responding by reshoring their businesses or looking to lower-cost countries like Mexico, India, Vietnam, and parts of Europe to set up new plants, others—especially in the auto industry—are riding out the storm and discovering new opportunity.
Higher wages in China has led to a growing middle-class hungry for new consumer goods. At the same time, the Chinese government is attempting to balance out economic growth by bolstering consumer spending and the services sectors and de-investing in traditional growth engines like heavy industry, real estate, manufacturing and export.
This is good news for the U.S.
Chinese domestic demand is currently growing at eight or 10 percent a year, and while China may no longer be a cheap place to manufacturer goods for export, there’s great opportunity in its consumer market.
Retooling manufacturing plants in order to sell to local markets utilizing local suppliers is already proving profitable for some U.S. manufacturers.
Automakers sold 19.3 million vehicles in China in 2012, nearly 5 million more than in the U.S., and some estimate that Chinese consumers will buy 30 million cars annually by 2020.
General Motors, Ford, and Volkswagen are all heavily entrenched in China. General Motors plans to invest $7 billion in China by 2015 with the goal of outselling Toyota.
General Motors recently introduced the Buick Encore compact crossover to the Chinese market, while Ford is launching the Ford Kuga and EcoSport. Crossovers and SUVs are proving particularly profitable in China, with sales rising 50 percent in the first two months of this year.
Luxury cars are also selling like hotcakes as wealthier Chinese consumers look for something different.
For now at least U.S. automakers seem to have hit a sweet spot with Chinese consumers, partly because they offer a wide selection of appealing models and partly because Japanese automakers are out of favor over the South China Sea debacle.
The Chinese government is cultivating its own cluster of China-based automakers with a plan to export more aggressively.
But while China exports 1 million vehicles a year to emerging markets, it’s a long way off from competing on the U.S. market. Chinese auto manufacturers are struggling to meet quality, safety and emissions standards while U.S., European, and Japanese automakers—already accustomed to meeting stringent regulations—have a head start.