Fundamental Growth Equity
Manufacturing: America’s New Growth Opportunity
December 2013
Thomas J. Pence, CFA
Senior Portfolio Manager
Fundamental Growth Equity
Michael T. Smith, CFA
Co-Portfolio Manager
Fundamental Growth Equity
Ozo Jaculewicz, CFA
Associate Portfolio Manager
Product Specialist
Fundamental Growth Equity
Executive summary
 Established manufacturers have faced relentless competition from upstarts in emerging economies over the past decade.
But U.S. industry has found a renewed and growing competitiveness in total production costs in recent years.
 Wages have risen rapidly in developing countries. In the U.S., labor market flexibility, advances in manufacturing technology
and growing capital intensity are further reducing the threat of low wage competition.
 Innovation and market incentives have spawned an energy boom that will be enjoyed broadly by the U.S. economy
and provide several direct and indirect cost advantages to U.S. industry.
 At the margin, a growing number of supply chain managers are increasing their manufacturing footprint within the U.S.
Opportunities surrounding this theme will abound for thoughtful investors.
Introduction
In the midst of a fitful economic recovery, several forces are
quietly aligning to bring resurgence in American industry.
Declining relative labor costs, increasing energy supply, and
advances in productivity-enhancing technologies are, together,
elevating the United States to a position of preferred
destination among developed countries for manufacturingrelated investment.
In this paper, we explore important aspects of these changes
from the viewpoint of a global supply chain manager contemplating the next plant location or an investor seeking to
allocate capital. We cite compelling evidence to illustrate the
magnitude and durability of these trends.
At its core, we argue that America’s renewed competitiveness
is rooted in the U.S. economy’s unique ability to respond
to shocks brought about by globalization. Perhaps no single
country has had a more transformative impact on the global
economy this century than China—its growing presence felt
in nearly every industrial activity. It is here where our American
growth story begins.
“Capital will flow where it is wanted and stay where it is
well treated.” ­
‑ Walter Wriston, Former Chairman & CEO, Citigroup
China’s accession to the World Trade Organization (WTO)
in 2001 was a watershed moment for globalization, marking
the fruition of Deng Xiaoping’s 1978 reforms, and the official
opening to enormous pools of underutilized labor and unmet
consumer demand. The threat to low margin, high labor
content manufacturers in developed economies was as
conspicuous as the opportunity; offshore your supply chain
or be undercut by your competition. Offers of cheap industrial
land, tax holidays, and other direct and indirect subsidies
reinforced the offshoring trend. It is no coincidence that
China replaced the U.S. as the most favored destination for
foreign direct investment that year, according to a manager
survey by A.T. Kearney.1
But fierce competition for scarce resources has rapidly eroded
several of the cost advantages of manufacturing in China, as
detailed in pioneering research on this topic from The Boston
Consulting Group (BCG). Most important among these, for
our discussion, are changes in labor costs.
It is important to put wage statistics into
perspective in order to draw meaningful
conclusions. Despite their massive percentage increase since 2000, estimated Chinese
factory wages (at about $4.50/hr) will
still be only 17% of the U.S. equivalent by
2015.2 On the surface, Chinese labor appears
to maintain a sizable advantage. But raw
wage statistics ignore two important and
related considerations: (1) productivity
of labor and (2) percentage labor in total
costs. The following example illustrates
how these factors mitigate China’s true
labor cost advantage.
800%
Chinese factory wages
2000 to 2015 (estimated)
Sources: BCG, Internal
Adjusting wages for productivity
The Yangtze River Delta region is broadly representative of China’s
industrial heartland and has one of the most productive labor pools
in the country. It also ranks among the most likely locales for the types
of manufacturing that will compete directly with new plants in the U.S.
South. Hourly wages for workers in this region are a fraction of their U.S.
counterparts, but so is worker productivity. In 2000, for example, worker
productivity in this region was only 13% of that of a comparable U.S.
worker. Thus, $0.72 per hour represented $5.53 in productivity-adjusted
terms, or 35% of the U.S. equivalent.2
By 2015, the estimated labor cost advantage in this region after adjusting
for productivity growth will have deteriorated substantially. As illustrated
in Figure 1 below, a comparable Chinese worker will soon earn 60% of the
U.S. equivalent, and many analysts believe the gap will continue to close
as Chinese labor market reforms, employee activism and labor shortages
raise wage costs.3
Figure 1: Productivity-adjusted wages ($/hr)
$30.00
U.S.
$24.81
5.50
6.00
6.50
$15.03
$10.00
60%
35%
8.00
China is not alone in this experience. Wage gains in recent years have
exceeded productivity gains across most major emerging economies,
including Brazil and India,4 as well as major industrialized economies.5 One
notable exception is the U.S. (Mexico is another exception we highlight on
page 3). The unique U.S. experience can, in large part, be attributed to labor
market flexibility.
The U.S. Department of Labor reported the loss of 5.8 million manufacturing jobs from 2000 to 2010. Moreover, factory wages stagnated, declining
by approximately 2.5% in real terms between 2000 and 2012.6 Headlines
often name offshoring as the primary culprit behind manufacturing job
losses. However, research by McKinsey Global Institute suggests that only
20% of job losses during this period resulted from trade and offshoring;
fully 63% were lost to productivity growth.7 The continuous adoption of
lean production methods, new technologies, and automation has been a
long-standing feature in U.S. manufacturing (see Figure 2). Stiff foreign wage
competition has only accelerated the importance of productivity growth
on U.S. labor costs.
WELLS CAPITAL MANAGEMENT
1/13
1/12
1/11
1/10
1/09
9.00
1/08
Sources: BCG, Internal
8.50
1/07
2015 est.
1/06
$0.00
2000
7.50
1/05
$5.53
1/04
$5.00
7.00
1/03
$15.81
1/02
$15.00
Appreciating currency
Two attempts to peg the yuan/dollar
exchange rate have failed. An ever-increasing
supply of U.S. dollars has forced the yuan’s
continued appreciation, making the dollar cost of
operating in or sourcing from China higher, and
the cost of U.S. manufactured goods for Chinese
consumers cheaper.
Yuan/Dollar spot rate
January 2001 through October 2013
China
$20.00
Increasing property prices
Finding industrial property in China has
become increasingly difficult, and companies must pay up. In 2010, coastal industrial land
prices ranged from $11.15/square foot in Ningbo
to $21.00 in Shenzen. By contrast, industrial land
in Alabama, Tennessee, or North Carolina ranges
from $1.30 to $7.43/square foot.2
1/01
$25.00
Callout 1: Rising costs of doing business
in China
Source: FactSet
Higher cleanup costs
Costs of pollution have long been externalized by Chinese industry onto public
health. In January 2013, particulate pollution in
Beijing reached 40 times the level the World
Health Organization deems safe, forcing an official
response. In mid-2013, China announced a 5-year,
$275 billion cleanup program (equal to twice the
annual defense budget).8 Now, a strengthening
environmental movement will force industry to
shoulder more of the costs. China is expected to
head off its increasing dependence on coal with
significant investments in costly renewables.
2
Callout 2:The middle kingdom –
China’s unique position
Rising labor costs have made Chinese industry a
victim of its own success. Recent losses of lowskilled manufacturing to lower cost centers in
Southeast Asia beg the question; will industrialization
of other emerging economies be equally as
disruptive to the global economy?
The simple answer is ‘no’, owing mainly to China’s
huge labor force – about 787 million strong at
the end of 2012 according to The World Bank.
Coupled with its supply chain density, higher
relative labor productivity and closer proximity
to the Chinese consumer market, it will maintain
a dominant share of low-value manufacturing.9 At
the margin, wage competition in labor-intensive
manufacturing is a more direct threat to Chinese
industry than it is to developed economies that
have already ceded this business.
Following the typical pattern of development,
Chinese industry is being guided up the value
chain.10 It is a common misconception that
China will dominate high-value manufacturing.
In reality, China is coming ever more into direct
competition with Europe, Japan, Korea, and North
America in capital-intensive manufacturing, this
time without a significant factor cost advantage.
As a result, we believe China will increasingly stake
a middle ground between labor and capital-intensive
manufacturing in coming years.
Mexico will be more attractive
Mexican factory wages were four times higher
than Chinese factory wages in 2000. By 2015,
however, Chinese wages are expected to be 25%
higher than the Mexican equivalent.2 Mexico also
benefits by its proximity to the U.S. and Canada in
several ways:
 Lower logistics costs and lead times
 Duty free access via NAFTA
Close proximity to U.S. energy supply (we
explore the implications in the next section)
Additionally, the degree of supply chain integration
between the U.S. and the industrial border region
of Mexico suggests that a significant portion of value
in Mexican production reflects U.S. parts content.11
Figure 2: Rising output, declining employment
1988 through 2012
180
20
China Joins WTO
160
18
140
16
14
120
12
100
10
80
8
60
40
US Mfg. Output/Hr (2002=100) - Left
20
US Mfg. Employment (Millions) - Right
0
Dec-88
Dec-91
Dec-94
Dec-97
Dec-00
Dec-03
Dec-06
Dec-09
6
4
2
0
Dec-12
Sources: Bureau of Labor Statistics, FactSet
Declining importance of labor in total costs
Today, U.S. industry is characterized by unprecedented levels of operating
leverage and capital intensity. A study by Empirical Research Partners
quantifies the impact on the average U.S. plant, estimating that the ratio of
wages and benefits to output declined from 19% in 2000 to 16.5% in 2010.6
This cost structure further reduces the importance of remaining wage
advantages of emerging competition (see Callout 2).
America’s industrialized competition has been slower to adapt. Figure 3
illustrates the change in unit labor costs (ULCs) of the U.S. with respect to
major European exporters and Japan from 2002 through 2011 (ULCs scale
wage costs per unit of output). To varying degrees throughout the industrialized world, rigid labor markets and entrenched industrial policies have
forestalled the capacity adjustments required to respond to globalization.
One symptom of excess capacity is deflationary pressure.
Figure 3: Change in Unit Labor Costs in Mfg. 2002 through 2011
U.S. Dollar Basis
100%
80%
60%
40%
20%
0%
-20%
United States
Japan
France
UK
Germany
Italy
Sources: Bureau of Labor Statistics, FactSet
WELLS CAPITAL MANAGEMENT
3
By itself, a more competitive U.S. labor supply may not be enough to move
the needle for a supply chain manager contemplating the next plant location.
After all, we have illustrated that the average U.S. manufacturer now faces
a cost structure that is less labor-intensive and more capital-intensive than
ever before.
However, we believe it is precisely in capital-intensive manufacturing where
the U.S. will parlay a newfound competitive advantage. Flexibility, profit
motive, and technological prowess have allowed the U.S. energy sector to
respond effectively to price signals generated by increasing global demand
for energy resources. Its success has taken many industry observers by
surprise. For now, we table our discussion of labor markets to explore the
economics behind the U.S. energy boom and how its implications extend
far beyond the energy sector.
The fracking revolution
The Paris-based International Energy Agency (IEA) forecasts that, by 2035,
global energy demand will grow by one-third from today’s levels due almost
entirely to non-OECD (Organisation for Economic Cooperation and
Development) country economic growth. China, India, and Middle Eastern
countries will account for 60% of this increase.12 Energy prices have risen
dramatically since 2000 and will continue to rise throughout the IEA forecast period. As a consequence, costly techniques to develop new energy
supplies, whether traditional or renewable, are becoming increasingly viable.
Callout 3: U.S. power generation
Advancements in solar, wind, and biomass technologies have not yet rendered products that can
compete with traditional energy sources absent
significant subsidies. With the exception of biomass,
most renewables are used almost exclusively in
electricity generation and face substantial transportation and storage costs. Their use is expected
to grow significantly through 2040, albeit, from a
relatively low base.
U.S. electricity generation by source
(billion kilowatt-hours)
2,000
2011
1,800
2040
1,600
1,400
1,200
1,000
800
600
400
200
0
The developments of hydraulic fracturing and horizontal drilling methods
were entrepreneurial responses to rising prices.The “revolution” is embodied
in the extraordinary production increases from what initially were considered
incremental advancements in drilling technology. Today, the cost to drill a
horizontal well is roughly two to three times that of a traditional vertical
well, but yields can be 10 to 20 times greater, by our estimates. Extraction
costs per British Thermal Unit (BTU) have had the unlikely experience of
declining, breathing new life into aging fields and unlocking vast tracts of
formerly unviable reserves in shale and tight rock formations.
Techniques pioneered to drill for natural gas have been adapted to drill
for oil with similar success. Forecasts from the Energy Information
Administration (EIA) reveal that nearly all of the increases in natural
gas and oil production in the U.S. in the next 30 years will be sourced
from shale and tight formations.13
“Power (electricity) investment accounts for 46% of the expected $37
trillion investment in global energy infrastructure to 2035.”
- Citi Research
Equally as important, price linkages among various energy sources are
strengthening.14 This is driven in part by the growing global importance of
electric power generation in primary energy consumption; to varying
degrees, fossil fuels, nuclear, hydroelectric, and renewables are substitutable
in electricity production (see Callout 3). Strengthening price linkages are
also being driven by massive investment in pipeline and delivery infrastructure
and in new transportation fuel technologies, from renewable biofuels to
traditional gas/coal-to-liquids. The implication is that a production advantage
in one type of energy supply can have a much more pervasive impact on
economic activity as consumers substitute to cheaper alternatives.
WELLS CAPITAL MANAGEMENT
Coal
Natural Gas
Nuclear
Renewables
Source: EIA
Natural gas will make the largest gains in U.S.
power generation due in part to its abundance,
but also its ability to fill in the gaps created by
intermittent availability of solar and wind power.
Natural gas-fired power plants can be turned on
and off easily compared to the base-load generation properties of coal, nuclear, and hydroelectric
sources. Citi Research suggests that the “peaking
power” characteristic of gas is key to achieving
power grid stability. In this view, gas promotes the
adoption of renewables and vice versa.14
Despite talk of its demise, the EIA forecasts that
coal will remain the most important source of
electricity generation in the U.S. and exports of
coal are expected to increase to Europe and Asia.
To offset greenhouse gas and particulate emissions
from coal and/or to replace nuclear generation,
China, Japan, and European countries have set
ambitious targets for renewables, ultimately
pressuring industrial and consumer electric rates.
4
Callout 4: High activity in energy sector
In the past several years, there has been a significant shift in the competitive landscape in upstream
activities. The large oilfield services firms, including
Baker Hughes, Halliburton, and Schlumberger,
have reported increased competition for pressure
pumping contracts in dry gas plays with numerous
smaller competitors. Services firms have followed
the large exploration and production companies
to shale oil plays, which require more specialized
services. Overall, their share of pressure pumping
services has fallen from 85% a decade ago to 63%
today, and margins have also deteriorated.16
Capital for pipeline and delivery infrastructure has
flooded the MLP markets. Accoring to Energy
consultancy, Macquarie, almost seven million
barrels a day of new capacity to service the Gulf
Coast is scheduled for completion between
2013 and 2015.17 Wood Mackenzie reports that
construction of $40 billion in oil pipelines is now
underway or planned in the next few years.18
Oil is exploiting existing transportation
infrastructure
The Wall Street Journal reports that barge and
truck traffic have increased by 53% and 38%
respectively from 2011 to 2012. The most dramatic
increase has been seen in rail traffic, which for
2012 increased by over 400%! According to the
Association of American Railroads, shipments of
crude by rail have increased from 9,500 carloads
in 2009 to 233,811 carloads in 2012. They project
growth to 389,000 carloads in 2013. Mirroring U.S.
rail activity, shipments of crude from Canada are
expected to grow from 6.6 million barrels in 2012
to a projected 110 million barrels by 2014.19
Once seen as a stopgap, rail has proven so effective
that some refiners have come to incorporate it
into long-term plans, despite higher operating costs
and greater potential for spills. Refiners prefer
to bargain with different suppliers in different
locations rather than be wholly dependent on the
economics of a pipeline.
How will fracking impact industry?
The above developments suggest that the fracking revolution will be a
critical driver of broad U.S. economic growth. But between these new oil
and gas supplies, two key distinctions will impact how broadly their effects
will be felt by U.S. industry: (1) sustainability of production increases and
(2) ease of transport.
Sustainability of production increases
U.S. oil production increases are large in the near term, but the EIA
forecasts they will peak by around 2020. By contrast, shale gas production
is expected to continue to increase beyond the forecast period through
2040, producing positive net exports by around 2020.13 The U.S. has already
reclaimed top-producer status from Russia in 2013.15 Even if long-term
gas production increases follow a more moderate trajectory than baseline
estimates, the growing influence of the new gas supply is beyond dispute.
Ease of transport
Crude oil has high energy density per volume and is easily transportable
in its natural liquid state (it is exactly these physical attributes that have
made oil products ideally suited as transportation fuels for more than 100
years). Midstream operators in the energy sector have made remarkable
progress utilizing existing infrastructure to bring the glut of shale oil from
the nation’s interior to coastal regions (see Callout 4). But long-standing
export restrictions on crude oil suggest that refiners stand to reap significant
margins for refined products that can be sold in global markets. We believe
this is an attractive area for investment.
In contrast to crude oil, transport options for gas are inherently more
limited. LNG ports are costly to build and operate, inflating delivered prices
of gas over long distances. For example, U.S. natural gas prices are expected
to be $4 to $6 per million BTUs by 2015. The delivered cost of the same
volume of gas to Asia could be between $10 and $12/MMBtu according to
Citi Research. The approximate 100% upcharge reflects costs of liquefaction, boil-off losses, and regasification, coupled with the high capital costs of
building terminal and shipping infrastructure. Gas pipelines are no panacea.
They are even more expensive to construct and operate than LNG
infrastructure for distances greater than 2,000 km.14
Figure 4 illustrates that regional gas price disparities are forecasted to
persist due in part to the high costs of transportation discussed above.
They also reflect a low potential for significant supply increases outside
of the U.S.
Figure 4: Regional natural gas price forecast ($/MMBtu)
$16
$14
$12
$10
$8
$6
$4
$2
Japan, LNG
$0
2010
2015
Europe
2020
United States
2025
Source: The World Bank
WELLS CAPITAL MANAGEMENT
5
Could a shale revolution in another part of the world reverse these regional
price disparities? We discuss in the adjacent callout why this is highly unlikely
in the near to medium-term. Below, we present arguments that suggest a
large part of the demand response to the low-priced gas supply will come
from a broad cross-section of U.S. industry.
Figure 5 below illustrates that the bulk of the forecasted increase in gas
consumption will occur in the broad industrial and electric power generation
sectors, the latter of which partially serves industrial uses. The accelerating
use of gas in the transportation sector results from the rapid adoption of
heavy-duty natural gas derived fleets that transport finished and intermediate
goods.14 It is clear that lower gas prices can directly impact a company’s
heating, electric, and shipping costs. Moreover, because one business’s
finished product is another’s raw input, cheap gas will have a much more
cumulative and pervasive impact on industry than first meets the eye.
Figure 5: U.S. natural gas consumption by sector (Tr Cu Ft.)
12
History
2011
Projections
Industrial
10
8
Electric power
Residential
4
Commercial
0
1990
Transportation
2000
2010
2020
2030
2040
Source: EIA
Supply chain benefits of cheap energy
Energy intensive industries that use fuels for thermal requirements or as
direct feedstocks can, to varying degrees, substitute fuels in their production
processes and thereby accrue some benefit from lower gas prices. The left
side of Figure 6 lists energy-intensive industries and the projected growth
in value of their shipments through 2040. These shipments are generally
bulk commodities.
The nature of commodity output has two relevant characteristics for our
discussion: (1) brutal price competition among suppliers forces a substantial
portion of energy cost savings to be passed to customers in the form
of lower prices, and (2) shipping and logistics costs can dominate total
delivered costs of some commodities over longer distances, which ultimately
favors local consumption. For these reasons, non-energy-intensive industries
in the U.S. (mostly manufacturers as illustrated in the right side of Figure
6) are positioned to benefit from cheap U.S. energy in the form of lower
materials costs. Raw materials costs are a meaningful component of total
costs for most manufacturers.
WELLS CAPITAL MANAGEMENT
Not in my backyard (NIMBY)
The science surrounding the effects of hydraulic
fracturing is in its early stages. Concerns about
potential risks of seismic events or pollution of
underground water supplies are causing indefinite
delays or moratoriums on new fracking activities
in several communities globally, including the U.S.
NIMBY is particularly acute in areas with higher
population densities and where agriculture
competes heavily for water resources.20
Water
Fracking fluid is typically 99.5% water and sand.21
Data gathered on the Marcellus shale reveal that
each well required on average 4.2 to 5 million
gallons of water to fracture, only 10% of which was
recycled.22 In a separate study, the IEA indicated
that between 70 and 700 truckloads of water are
required for one well.13
The EIA reports that China, Argentina, and Algeria
have larger shale gas reserves than the U.S. Apart
from unreliable power grids and lack of required
transportation infrastructure, there are often
severe shortages of water. Given political obstacles
surrounding “severe water stress” and pollution, it
is difficult to imagine large-scale fracking initiatives
in the near term.8
6
2
Callout 5: Is America’s fracking boom
merely the first of many? Not likely.
Private property rights
The energy sector in most countries is considered
part of the public trust, if not under complete
government control.Where private exploration and
production companies with necessary expertise
do have contracts, risk of expropriation, nationalization, or price controls increase the risk premium
required for any venture. India is thought to
have considerable oil and gas reserves, but even
domestic producers are forced to accept prices
from $2 to $5 per MMBtu, a fraction of imported
LNG prices.23 In another example, Mexico gathers
one-third of all government revenues from state
oil company PEMEX, which is used as a source of
funding for social priorities.24 Without sufficient
profit incentive, underinvestment inevitably results.
The U.S. is one of the few places in the world
where private parties can directly own mineral
rights in the ground. Most of the fracking revolution in the U.S. has occurred on private lands.25
6
Figure 6: Cumulative % growth in value of U.S. shipments
2011 through 2040 (Reference case projections)
Note: Decline in liquids refinery shipments parallels lower oil use in transportation fuels
Non Energy-Intensive Industry
Energy-Intensive Industry
Primary
Materials
140
Other
Mfg.
120
100
80
60
40
20
0
-20
Source: EIA, Internal
In this way, the benefits of cheap energy, particularly gas, are
dispersed broadly among U.S. based industry. Critically, most
non-energy intensive manufacturers listed above have a key
similarity in their cost structures; a meaningful percentage of
medium- to high-skilled labor content. It is here where our
story comes full circle. In our closing section, we discuss how
U.S.-based manufacturing will occupy a competitive sweet spot
between improving labor and energy factor costs.
A one-two punch: Lower total costs
Figure 7, adapted from BCG research, illustrates the total
manufacturing cost breakdown of major global exporters
relative to the U.S. in 2003, and again in 2013.26 In the past 10
years, the U.S. competitive position has improved versus every
country presented due almost exclusively to relative improvements in both labor and energy factor costs. Moreover, the
strength of the underlying trends we discussed above will
likely sustain the improved U.S. competitive position.
Hundreds
Figure 7: Energy, labor, and other costs of manufacturing production by country in 2003 and 2013
Scaled to U.S. total costs = 100
Note: Other costs primarily include materials, machinery, containers and packaging
+18
120%
+11
110%
+9
+8
+6
+5
+18
+19
Energy
+17
+9
+3
100%
90%
+2
-2
-6
Labor
+13
+7
Other
+3
-3
-11
-14
-11
-8
-7
-18
80%
70%
60%
Source: BCG, Wall Street Journal, Internal
WELLS CAPITAL MANAGEMENT
7
Critically, these point-of-manufacture total cost estimates
exclude shipping and logistics costs. All things equal, these act
as frictions that favor local production for local consumption.
Empirical Research Partners estimates that shipping costs
account for roughly 7% of the value of imports to the U.S.
from China for a basket of goods.6 Thus, for manufactured
goods that will be consumed in the U.S., American manufacturers are approaching parity in total delivered costs with
arguably their stiffest competition in the world!
BCG estimates that by 2020, 10% to 30% of the production of
goods that the U.S. now imports from China could shift back
to the U.S.27 The specific industries and their relative importance
in dollar terms are detailed in Figure 8 (note the similarity of
industry composition to those highlighted by data from the
EIA in Figure 6). The value of Chinese imports in these areas is
small in the grand scheme of global trade. However, to say the
least, this makes for a strong argument that the bleeding from
offshoring may have stopped.
Figure 8: 2010 Value of U.S. imports from China in
“tipping point” industries
These industries account for almost $2 trillion in U.S.
consumption
$9 $6
Computers and Electronics
$10
Appliances and Electrical
Equipment
Machinery
$13
$16
$25
Furniture
$122
Fabricated Metals
Plastics and Rubber
Transportation Goods
Source: BCG, U.S. National Census Bureau, U.S. Bureau of Economic Analysis
Higher U.S. exports
The bigger trade gains will likely come at the expense of
America’s major export competition in Europe and Japan
whose industrial compositions are more similar to that of the
U.S. BCG estimates that U.S. exports will supplant from 2% to
5% of the exports of the top-four European economies, and
1% to 2% of Japan’s exports by 2020.5 These represent sizable
and rapid shifts in the context of the $12.6 trillion in total
global manufacturing exports reported by the OECD.28
WELLS CAPITAL MANAGEMENT
Anecdotally, the U.S. has already attracted significant manufacturing-related investment from a long list of high profile
companies seeking to distribute within North America or
export overseas. Figure 9 presents only a partial list.4 We
believe countless other manufacturing-and services-oriented
companies will benefit to varying degrees from the trends we
have discussed herein, as will investors who understand their
long-term implications.
Figure 9: Companies that have announced expansion
in U.S. production since 2012
Airbus
Lenovo
Alita USA
Mansfield Plumbing
Alleghenny Technologies
Marinetek
American Giant
Maserati
American Standards Brands Master Lock
Apple
Michelin
Benteler Steel/Tube
Motorola
Burns Harbor Steel Mill
NCR
Caterpillar
Nissan
Chevron Phillips
Norfolk Southern
Chemical Makers
Orascom
Collegiate Bead Company
Otis Elevator
Consumer Energy
RailOne
Core Systems
Rolls-Royce
Dow Chemical
Samsung
Dyno Nobel
Sasol
Electrolux
SKF
Element Electronics
Smith Electric
ExxonMobil
Stanley Furniture
Flextronics
Starbucks
Foxconn
Tenaris
Fuji Heavy Industries
Timken
GE
Toto
GM
Toyota
Google
Trellis Earth Products
Honda
Volkswagen
Huntsman
Walmart
Jacobs
Whirlpool
Source: Cornerstone Macro, 10/24/2013
8
Conclusion
In this paper, we have focused on two ways the U.S. economy
has uniquely adapted to changes brought about by globalization.
In summary:
 The U.S. manufacturing sector has accommodated the
entrance of low wage competition from developing economies
through labor market flexibility and advancements in production technologies. These have steadily improved relative
productivity-adjusted labor costs of U.S. manufacturers
while increasing operating leverage and capital intensity.
 Technical breakthroughs in energy exploration and production, driven by profit incentives, have allowed the U.S. energy
sector to create a significant supply response to rising global
energy prices. A broad swath of U.S. industry, including
non-energy-intensive manufacturing sectors, is positioned
to capture sustained energy cost savings directly across
several expense line items and indirectly through lower
materials costs.
These adaptations have combined to create meaningful total
cost advantages for U.S.-based producers across several manufacturing sectors. Many high profile companies have already
incorporated a greater manufacturing presence in the U.S.
with new plants in several Southern states and reviving industrial
clusters elsewhere. We believe the factors driving the U.S.
manufacturing renaissance are sustainable with many knock-on
benefits for the broader U.S. economy:
A.T. Kearney FDI Confidence Index – News Release - 6/26/2013
The Boston Consulting Group – Made in America, Again – 8/2011
3
International Monetary Fund – The End of Cheap Labor – 6/2013
4
Cornerstone Macro – Economic Research – 10/24/2013
5
BCG Perspectives – The U.S. as One of the Developed World’s Lowest-Cost
Manufacturers – 8/20/2013
6
Empirical Research Partners – Portfolio Strategy – 6/2012
7
The Washington Post – Dispelling Myths About Manufacturing – 4/30/2013
8
Economist – China and the Environment: The East is Grey – 8/10/2013
9
Economist – Manufacturing: The End of Cheap China – 3/10/2012
10
Wall Street Journal – U.S. Manufacturers Gain Ground – 8/18/2013
11
BCG Press Release – 6/28/2013
12
International Energy Agency – World Energy Outlook 2012 – 11/2012
13
U.S. Energy Information Administration – Annual Energy Outlook 2013 – 5/2013
14
Citi GPS – Energy Darwinism – 10/2013
15
EIA – Today in Energy – 10/4/2013
 Each dollar spent in manufacturing generates $1.35 in
additional economic activity, according to the Bureau of
Economic Analysis.29 Others have suggested higher multipliers.
There is little doubt that private investment in manufacturing
activity creates significant business and employment opportunities in related services businesses.
 Cutting edge research and technologies that drive incremental
productivity improvements spill out of individual businesses
into related industry. This is the external benefit of “learningby-doing.”
 In addition to improved long-term prospects for employment, consumers realize several benefits from cheaper
energy prices that extend their purchasing power. Lower
gasoline prices, electric rates, and heating bills reduce the
“energy tax” on consumers as much as businesses.
 Domestically sourced energy improves U.S. trade balances,
supports the U.S. dollar, and reduces risks of exogenous
energy shocks on economic growth.
The manufacturing renaissance is a prominent theme with numerous constructive investment implications. But its relevance, as
the relevance of any theme, is wholly dependent upon the
unique circumstances faced by any given company. Therefore,
in our view, investors can most optimally benefit from the
theme through deep and holistic fundamental research.
Wall Street Journal – Fracking Firms Face New Crop of Competitors – 7/9/2013
Wall Street Journal – U.S. Oil Prices: Don’t Call It a Comeback – 7/12/2013
18
Wall Street Journal – Pipeline Squeeze Reroutes Crude – 8/26/2013
19
Wall Street Journal – Deadly Derailment Fuels Crude-by-Rail Concerns – 7/8/2013
20
Inferential Focus – Scrambling the Global Energy Market – 12/20/2012
21
Wall Street Journal – Sonar Tech May Drive Fracking Benefits – 8/9/2013
22
Wall Street Journal – Energy Firm Makes Costly Bet–On Water – 8/13/2013
23
Economist – Indian Energy: A Price Worth Paying – 7/6/2013
24
CNBC – Mexican Energy Reform: Here Are The Winners – 8/16/2013
25
Wall Street Journal – How Adam Smith Revived America’s Oil Patch – 6/9/2013
26
Wall Street Journal – A Change In The Cost Equation – 6/11/2013
27
BCG Perspectives– U.S. Manufacturing Nears Tipping Point – 3/22/2012
28
Organization for Economic Cooperation and Development, 2013
29
Bureau of Economic Analysis – U.S. Manufacturing in Context, 2013
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WELLS CAPITAL MANAGEMENT
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Thomas J. Pence, CFA
Managing Director and Senior Portfolio Manager
Tom Pence is managing director and senior portfolio manager for the Fundamental
Growth Equity team at Wells Capital Management. Tom has oversight and portfolio
management responsibility for all growth equity portfolios managed by the team.
He joined WellsCap from Strong Capital Management where he served as lead
portfolio manager. Prior to joining Strong in 2000, Tom served as senior vice president and chief equity investment officer of Conseco Capital Management. While at
Conseco, he was responsible for managing all tax-exempt and taxable growth equity
portfolios as well as various mutual funds within the Conseco Fund Group. Prior
to joining Conseco in 1991, Tom worked for the Forum Group, where he oversaw
several transactions as part of the firm’s development and acquisition team. Before
joining the Forum Group he was a financial consultant with Peterson & Company
in Chicago. Tom holds a bachelor’s degree in business from Indiana University and
a master’s degree in business administration with honors from the University of
Notre Dame. He is a former board member of the Reese Investment Fund for Indiana University and has served as a director of the Indianapolis Society of Financial
Analysts. Tom has earned the right to use the CFA designation.
Michael T. Smith, CFA
Co-Portfolio Manager
Mike Smith serves as co-portfolio manager of the Fundamental Growth Equity
Team at Wells Capital Management. Mike has co-portfolio management responsibility for all growth equity portfolios managed by the team. He joined Wells Capital
Management in 2005 from Strong Capital Management where he served as a senior
research analyst focusing primarily on the healthcare sector. Prior to joining Strong
in 2000, Mike served as a research analyst and trader at Conseco Capital Management. Mike attended DePauw University, where he graduated with a bachelor’s
degree in economics. He serves on the McDermond Center for Management and
Entrepreneurship Advisory Board at DePauw University. He has earned the right to
use the CFA designation.
Ozo Jaculewicz, CFA
Associate Portfolio Manager and Product Specialist
Ozo Jaculewicz serves as associate portfolio manager and product specialist for
the Fundamental Growth Equity team at Wells Capital Management. In this capacity,
he assists the team with oversight of the investment process and client portfolio
management issues. Prior to joining Wells Capital Management in 2006, he was
a senior vice president at Metropolitan West Asset Management. Ozo spent the
previous six years as a senior vice president with Strong Capital Management—
where he worked closely with the Fundamental Growth Equity team. He started his
investment career in 1995 at SAFECO Asset Management in Seattle. Ozo earned
his bachelor’s degree in business administration and economics from Central
Washington University, and has earned the right to use the CFA designation. He is
a member of the CFA Society of Seattle and serves on the Board of Advisors of the
Fulcrum Foundation in Seattle, WA.
This paper significantly benefited from extensive research and development by Matt
Alexander, CFA, product manager at Wells Capital Management.
CFA® and Chartered Financial Analyst® are trademarks owned by the CFA Institute.
Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank, N.A. WellsCap provides investment management services for a variety of institutions. The views expressed are those of the author at the time of writing and are subject to change. This material has been distributed for
educational purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product. The material
is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. Past performance is not a guarantee of future returns. As with any
investment vehicle, there is a potential for profit as well as the possibility of loss. For additional information on Wells Capital Management and its advisory services, please
view our web site at www.wellscap.com, or refer to our Form ADV Part II, which is available upon request by calling 415.396.8000. WELLS CAPITAL MANAGEMENT® is a
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