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  • Chris Graham


Today I want to talk about manufacturing in China, US manufacturing, and a comparison of the two and the cost of each. At Crown Capital, we’re very focused on industrial companies, industrial services, industrial production, manufacturing, and fabrication because we think we're going to have about a 10 to 15-year tail wind pushing work into the United States.

Just as a baseline for that information, in 2005, which was up year for manufacturing, the United States manufacturing/industrialization produced a $1.8 trillion contribution to GDP.

In 2018, it was 13% greater at $2.13 trillion of contribution to GDP. That is faster growth than actual GDP, so you can see this tail wind just starting to take hold. Now, why it's taking hold is best represented by the Graniteville facility (Crown Capital operating company). When we first transacted on Graniteville, we asked them why they even exist. Why isn’t China doing all of this work? It turns out that out of 100% of work that they used to do in the 1960s and 70s, they kept 30%. Why? Because that work was very hard to reproduce offshore. It was higher end custom work that involves a lot of research and development and was very proprietary and collaborative with the customer. The truth is that probably 10% of the work even below that was also difficult to move offshore, but was marginally advantaged to move offshore, so it moved anyway, and it moved to China primarily based on the cost of labor. Then, China became more and more industrialized and moved from a third world economy to a first world economy. As that happens, this 10% to 15% of higher-end collaborative production work becomes less and less productive to produce offshore, so there is some entrenchment that happens initially, but as the cost continues to rise, that work starts to come back to the United States.

Why? Take a look at these total cost of production analysis as advised by Boston Consulting Group. In 2014, they suggested there was only a 5% difference overall between US cost of manufacturing and Chinese. That has since changed. Chinese costs are accelerating even more, in particular the rate of labor. Since 2005, there has been a 187% increase in the cost of Chinese labor. Since 2010 alone, there’s been a 121% increase. Just imagine how that changes the math on all of these. People assume that China is cheaper for manufacturing, but it turns out that today, Indonesia is the cheapest production facility in the world.

Another dramatic change has to do with worker productivity. US workers’ productivity per worker increased 22% since 2006. That's a dramatic increase while the cost of person offshore keeps rising dramatically.

The next few elements involve the transition from third world to first world and the fact that it requires a lot of regulatory change and regulatory change creates an uncertain market. That, in turn, changes energy costs and raw material costs. An example is coal in 2018. It jumped 50% because China came out and required a 16% shut down of production in their coal facilities. Then, of course, the normal suspects: transit costs, logistics risks like containers falling off of ships, etc., damage to supply chain making time to market a lot longer, and if you're working with an offshore supplier and delays in that supply chain, and then again, this design thinking and collaboration with local producers. All of these elements point to the fact that it's time to rethink our products and rethink where we build them. It might take some reinvestment in US

capital structures, but the time has probably come to make that effort.

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