US Manufacturing: A Bright Future Ahead
November 27, 2020
With economic uncertainty all around us, it can be hard to find the positive trends. But there is a bright future ahead for US Manufacturing - catch our newest TrendsTalk episode with ITR Senior Business Advisor Alex Chausovsky to learn more.
Transcript by Rev
My name is Alex Chausovsky. I'm a senior business advisor at ITR Economics, and welcome to another edition of Trend Stock with ITR. Today, I wanted to talk to you about one of my favorite markets in the economic landscape, and that is manufacturing. I think that many people have a lot of misconceptions about manufacturing, its prospects into the future, and really where it's come along over the last several years. I want to share with you that ITR Economics actually has a very favorable outlook on US manufacturing over the next decade. I want to encourage you that if you are a manufacturing company yourself, or if you sell to manufacturing companies, that the future really is bright and you should be investing for that future growth that we're expecting. There are many reasons behind this, but I wanted to provide you with some really interesting data and evidence to support this assertion that the 2020s really will be a decade for US and broadly speaking North American manufacturing.
To do that, I wanted to start by sharing with you the results of a survey by the Reshoring Institute, that basically asked companies, what are the major issues that you experienced from sourcing product overseas? The top three responses were latency and delays in shipping, that got 71% of their response, production schedule delays got 63% of the responders affirming that that was an issue for them and inconsistent quality got another 55% of the responders to say that that was a problem for them. When you think about these things, then you start to ask yourself, "Well, are the benefits of outsourcing still worth it relative to some of these challenges that come along with it?" I can tell you that the United States in particular, is really well positioned relative to some of these traditional outsourcing countries like China, Vietnam, or even Mexico, more locally speaking.
To prove this point, I wanted to share with you the data from the FM Global Resiliency Index, which ranks countries on a scale of one to 100, with the higher the number, the more resilient the supply chain in that country is. I'm very happy to tell you that the United States ranks highly on this index at 85.2%. Comparatively speaking, China is just at 61.8, mexico is a 50.5 and Vietnam is at 49.1. As you can see, the consideration is that the United States supply chain is significantly more resilient and less prone to risk than you'd have with some of these traditional outsourcing countries. That's very encouraging as we see business leaders and decision makers increasingly contemplate both the trade war developments over the last couple of years and the impact on their supply chains from the COVID-19 pandemic and what we all went through in the beginning of this year, to really ask themselves are the cost savings truly worth it. More on that in just a second.
In the meantime, I want you to understand that the rest of the world certainly thinks very favorably about being in the United States. Foreign direct investment into the US in 2019 represented the largest single flow of investment in the rest of the world. The United States, as of 2019, saw $261 billion of foreign money coming in to both acquire US companies and to set up new subsidiaries of foreign companies. By comparison speaking, the second largest flow of foreign direct investment went into China, but just at $156 billion. That was a significant drop-off relative to 2018 levels when China saw $235 billion of FDI. I think that this data really highlights the fact that when the world looks to invest their money, they're increasingly looking to the United States relative to some of the other places that have traditionally seen more investment in the past. When we think about who is investing in the US, the data there is also quite interesting.
Most people think that China has invested a huge amount of money in the United States, and historically, that has been accurate. More recently, we have not seen that. In fact, this notion that China owns a large percentage of the US is simply unfounded. For example, in 2019, China invested only $4.3 billion into the US. By contrast, the top three countries that invested in the United States were Germany at $42 billion, Japan at $38 billion and Canada at nearly $37 billion. As you can see, the sheer scale that these countries are investing in the United States relative to what China did in 2019, really makes that number pale in comparison. I mentioned earlier, the advantages of costs, and I wanted to highlight for you, some recent data from the Boston Consulting Group. What they did was they basically put together a manufacturing cost index in 2019 that tried to compare the US cost structure relative to many of these countries are from around the world.
They gave the United States an index value of 100. Anything below that value would represent cheaper manufacturing. Anything above it would represent more expensive manufacturing. You won't be surprised to find out that most of the European countries came in substantially higher than the United States. What was surprising to me is how little of a difference there was between the US and some of these traditionally thought of as very cheap to manufacture locations like China, Vietnam, and Mexico. With the US having a value of 100, China got ranked at only 95 to 97. essentially, meaning that it's only about three to 5% cheaper to produce in China than it is to produce in the United States. That's obviously the outcome of multiple decades of increasing prices in the Chinese market. Even third world countries or developing countries, if you will, like Mexico and Vietnam, don't have that much of a delta relative to the US anymore.
Vietnam is at 94 and Mexico is at 86. When you think about that, you've got to put that in context with those risk numbers that I talked to you about, showing that both Mexico, Vietnam, and China are significantly higher risk to the supply chain, than what you would achieve here in the United States. All of that put together to me, really conveys one very clear message, which is the United States manufacturing is going to continue to see investment. It's got a very bright future over the course of the 2020s. You, as a manufacturing company, as someone who supplies manufacturers, or is selling to manufacturers, you have a very bright future as well. Move forward with optimism, invest in the future growth in your business and leverage this business cycle low that we're going through right now to position your company, to capitalize on the full momentum of the rising trend that we expect in 2021. I hope you found that useful. Thank you so much for your time. I look forward to welcoming you again to the next edition of Trend Stock with ITR Economics. Have a great day.