Manufacturing in America: US Set for a 'Manufacturing Renaissance'

May 13, 2011 -- In the next five years, the U.S. will experience a "manufacturing renaissance," according to a new analysis.

As wages in China increase, flexible work rules and government incentives in the U.S. will make America one of the cheapest places to manufacture goods in the developed world, the Boston Consulting Group (BCG) analysis suggests.

"If the trend plays out, I think you'll see manufacturing growing and expanding in the U.S.," said Michael Zinser, one of the authors of BCG's analysis on manufacturing. "What we're expecting is that companies will step back and rethink their networks, rethink their supply chains."

Chinese wage rates likely will continue to grow by 15 to 20 percent year over year, Zinser said. When the increase in wages is combined with the increasing value of the yuan, the wage gap between the U.S. and China is narrowing rapidly.

"China is no longer expected to be the default low-cost manufacturing location for those companies who are looking to supply the U.S. market," Zinser told ABC News. "What we would expect to see is a convergence in terms of the wage rates to what we're seeing in the U.S. today."

Harold Sirkin, lead author of the analysis on manufacturing, expects the convergence to occur "by around 2015."

"As a result of the changing economics, you're going to see a lot more products 'Made in the USA' in the next five years," said Sirkin.

Romain Wacziarg, an economics professor at the University of California, Los Angeles, sees other factors involved.

"I agree that it's possible that manufacturing will come back, but I don't think it's due to rising costs in China," he said. "I think it's due more to the depreciation of the dollar ... not that wage costs are rising in China and not the U.S."

Currently, according to BCG, U.S. workers are three times more productive than their Chinese counterparts. But Wacziarg said the increase in wages indicates an increase in producitivy.

"It's more expensive to use a unit of labor there [China]," he said, "but that unit of labor is getting more productive."

As wages in China rise, Zinser said, some companies may decide to manufacture in the U.S., though others will look for lower wages in other countries.

But one of the advantages U.S. manufacturers have, according to BCG, is that the work force is becoming more flexible.

Kevin Sauder, president and CEO of Sauder Furniture, recently started sourcing component parts regionally, a process his purchasing team called "insourcing."

"Supporting local and American jobs is one factor that gets considered," Sauder told ABC News. "It's not the main factor, but it's one thing that gets considered. All things being equal, we would always prefer to go with a regional manufacturer. ... Using regional components improved our ability to be flexible in new product development."

The change allowed the company to get more contracts, Sauder said, because it was able to build prototypes more quickly for stores such as Walmart and Ikea because the component pieces arrived weeks earlier.

"Opportunities like that are worth a little extra money for the flexibility and speed," said Sauder. "I think that's where local and regional manufacturers do have an advantage ... flexibility and speed to market."

Even though the U.S. manufacturing sector maybe be poised for a comeback, Zinser cautioned that it did not mean China is on the decline.

"China is going to continue to be a major global player," said Zinser. "China is still a large market and many companies are going to want to continue supplying that market."

U.S. consumers should expect industries such as construction equipment and appliances to be impacted first, he said, while industries such as textiles and consumer electronics may never be affected.

"Where you have lower labor content as an overall percentage of your total costs and more modest volumes, we'd likely see those types of industries certainly having an impact sooner," Zinser said. "For industries where you have very high volumes, higher labor content ... we would expect that those are likely to stay in lower-cost environments."