Issue 22: 2012

Made in America: The Next Industrial Revolution

China and other nations are shifting production to the United States — and turning long-held assumptions on their heads.

PHOTOGRAPH BY ANDY RYAN

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For many Americans, this is a given: China makes almost everything for us. The Middle Kingdom has indeed been a formidable producer during the past two decades, mostly by using the so-called Chinese manufacturing formula: cheap labor + massive doses of foreign direct investment = production of virtually everything.

But China today is in the throes of change. Labor there is neither as cheap nor as plentiful as it once was. On top of that, other countries, especially the United States, are pioneering a new breed of robots capable of performing very high-end tasks more cheaply and accurately than humans can.

One upshot is that many U.S. firms are finding it more expensive to manufacture in China — and, in a twist, so are some Chinese companies.

As a result, more of China?s productive capacity in low-end goods is moving elsewhere. Some is headed south, to lower-cost Vietnam and Cambodia. Meanwhile, many Chinese companies dependent on U.S. consumers are moving production here.

And Chinese manufacturers are not alone. Firms from all over are coming here to be close to their U.S. customer base, to soak up the American entrepreneurial spirit, to do business in a resilient economy, and more.

MAKING ?STUFF? — AGAIN

This influx of foreign production is helping to kindle a manufacturing renaissance in this country. Indeed, manufacturing-related foreign direct investment (FDI) here was roughly $91 billion last year, while related outflows were just $59.2 billion, according to the U.S. Bureau of Economic Analysis.

So much for the long-held notion that U.S.-related foreign investment is mostly one way — outbound.

PERSONALIZATION

There?s another, nascent factor at work. The art of manufacturing is evolving, shifting away from mass production (which favors China) and toward mass personalization (which favors America). This is the fifth stage of manufacturing, according to Peter Marsh, author of The New Industrial Revolution: Consumers, Globalization and the End of Mass Production.

Firms from China and elsewhere are coming to the United States to soak up the entrepreneurial spirit.

This trend is happening for two key reasons: 1) customers are demanding more customized products; and 2) technological advances now allow firms to make faster design changes, run smaller batches, and use 3-D printing to create new products tailored to specific customer needs.

All of this suggests there will be more productive capacity in America and other wealthy markets in the years ahead.

POSTINDUSTRIAL?

Some commentators suggest that U.S. manufacturing will suffer because the world is entering a ?postindustrial era.? In the future, people will want fewer goods and more services, they say, thereby tilting economic activity away from manufacturing. But we don?t buy it.

In fact, we believe that with the global population set to expand to 8 billion during the next decade, and with middle classes in emerging markets poised to explode, demand for goods should remain robust. (Notably, global manufacturing output in 2010 was roughly 1? times higher than in 1990.)

GO U.S.A.

In the end, a number of variables are converging to shift more manufacturing production to our shores — and it?s a dynamic that underpins U.S. Trust?s bullishness, toward the United States in general and U.S. industrial leaders in particular, over the next three years. Rising wages in China, greater automation, the age of mass personalization, unfulfilled demand in the emerging markets — we think the outlook for U.S. manufacturing has rarely been brighter.

IMPORTANT INFORMATION

Projections made may not come to pass due to market conditions and fluctuations. Investing involves risk. There is always the potential of losing money when you invest in securities.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.