Cost Convergence with China: An Energizer for U.S. Manufacturing?

Is a shrinking cost gap between China and the United States for advanced manufacturing really changing the calculus of location decisions and making possible a “manufacturing renaissance” in the United States?

Optimists like Hal Sirkin of the Boston Consulting Group have been predicting a convergence of labor and other costs—and a resulting U.S. manufacturing revival—for several years, while skeptics like Jan Hatzius of Goldman Sachs still don’t see it

Yet for all that, hard facts have been in short supply. Instead, the debate has felt a bit disembodied, driven more by theoretical assertions and anecdotes than hard data.

However, a new paper just published in the Journal of Power Sources contains new information about the global advanced battery manufacturing industry derived some fresh reporting: the authors’ face-to-face interviews with managers in battery manufacturing plants in China and the United States.

What does the new paper by Ralph Brodd and Carlos Helou find? By systematically poring through all the major costs of constructing and staffing a stand-alone manufacturing plant for lithium-ion battery cells, Brodd and Helou find that the costs of producing that quintessential advanced manufacturing product in the United States and China are roughly the same.

How is this? According to Brodd and Helou’s exhaustive drill down, U.S. wage costs are clearly higher than those in China, but the heavy automation of a current-practice Li-ion battery plants reduces the number of needed workers, and so reduces that gap. Meanwhile, while materials costs in the United States  and China are identical, China’s high energy and logistics prices essentially erase China’s price advantage. On the energy front, Brodd and Helou’s reporting concludes that a facility producing 350 million battery cells in China would have approximately $1.5 million higher electricity costs than one in the United States. Relatedly, they note that high energy prices and fragmentation in the Chinese logistics industry ensure that trucking costs in the country’s two biggest export regions—the Yangtze River Delta region near Shanghai and the Pearl River Delta around Hong Kong—ranged from $2.50 to $3 a mile compared to $1.75 in the United States. These costs reflect China’s profusion of local and provincial road fees as well as the country’s rising trans-Pacific shipping and customs costs.

The upshot: The cost advantage of a Chinese Li-ion battery plant ranges from just 7 cents per unit to 25 cents per unit, compared to a U.S. site, depending on the production volume of the plant. And that leaves aside such other factors as increasing wage rates in China, quality deficits there, and the threat of unexpected supply chain disruptions, all of which would further argue for the cost superiority of a U.S. site. Also left out—and favoring a U.S. facility siting—would be the innovative synergies that may develop when R&D personnel have convenient access to the factory floor as well as the cost premium that may accrue from U.S. consumers’ preference for U.S.-made products.

As to what this all means for the manufacturing comeback debate, it doesn’t necessarily mean that a huge “in-sourcing” boom is coming in America. In the end, the Li-ion battery case is just one data point in the still-thin fact set that underlies the “manufacturing renaissance” claim, and clearly it reflects the relative costs and benefits of one product in one industry. Still, the new information clearly suggests, as Brodd and Helou conclude, that U.S. manufacturers—as they look to the future—may well find it “increasingly attractive and profitable to build highly automated advanced manufacturing facilities in the U.S.—nearer their R&D facilities and closer to their consumers.” 

In the meantime, the complexity of the moment makes it urgent that more up-to-date, thoroughly researched, and industry specific analyses such as Brodd’s and Helou’s be prepared so siting analysts and policymakers have real information to go on as decisions are made.