Thirty years ago, GE, like many U.
S.
companies, began moving some of its manufacturing overseas (appliances in GE's case).
Earlier this year, GE reversed course and started manufacturing a new hybrid hot water heater and refrigerator in Louisville, Kentucky.
Over the next few years GE will invest over $1 billion to start manufacturing 11 new products in Louisville, bringing 1,300 jobs back to the U.
S.
from Mexico and South Korea.
And GE is not alone.
Ford, Dow Chemical, NCR, Whirlpool, Master Lock and Stanley Furniture are just a few examples of companies that are bringing manufacturing back to the U.
S.
A decade ago, the lure for companies to move some of their manufacturing to many emerging market countries such as China was strong.
For example with China, their low wages, their currency peg to the dollar, cheap land prices, and generous government incentives provided compelling reasons for American companies to move manufacturing to China.
Today, many of those reasons have diminished.
Chinese wages grew almost 20% per year in recent years and are expected to continue growing rapidly.
China's rapid wage increases have reduced its labor cost advantage.
Additionally, China's currency has steadily appreciated versus the dollar (although not enough by some accounts).
Land prices to build factories in China have also increased dramatically and in some cities are now more expensive than similar land in parts of the U.
S.
Many of the once generous incentives China offered have been phased out.
The story is similar for other emerging countries as well.
In short, many of the factors that drew American companies to move their production to China and other countries are not nearly as compelling anymore.
American companies have also experienced additional challenges and difficulties from outsourcing their manufacturing overseas.
Rising shipping costs have offset some of the savings from cheaper labor.
Long supply chains have increased the risk of supply disruption, as companies found out following the Japanese earthquake and tsunami.
Companies have also experienced problems with intellectual property theft in some foreign countries.
In some cases, foreign companies that once manufactured products for a U.
S.
company now compete against that company with a similar product.
Product quality has also been an issue in some cases.
At the same time, the U.
S.
has become more competitive.
One big reason is cheap energy.
The shale natural gas boom has resulted in an abundance of natural gas that has sent natural gas prices to some of their lowest levels in 10 years.
Wholesale electricity prices have also benefitted from low natural gas prices and have plummeted roughly 50% since 2008 as well.
Natural gas prices in the U.
S.
are now a fraction of the price in other parts of the world.
This is a huge competitive advantage for energy intensive manufacturers such as chemical companies.
Many chemical companies such as Dow Chemical are moving plants back to the U.
S.
to take advantage of the new abundant source of natural gas and the extraordinarily low prices.
In January, Methanex Corp.
decided to move its plant from Chile to Louisiana.
Low energy prices were one reason Santana Textiles decided to build their $180 million plant in Texas rather than Mexico.
American steel makers such as U.
S.
Steel Corp.
have also been big beneficiaries of cheap energy.
If managed properly, America's vast supply of cheap natural gas will be a big draw for energy intensive producers to build or expand plants in the United States.
The digitization of manufacturing is another key reason for America's increasing manufacturing competitiveness.
Manufacturing is undergoing tremendous changes as advances in robotics, automation and 3D printing are revolutionizing manufacturing.
In the article "A Third Industrial Revolution," The Economist writes, "Digitization in manufacturing will have a disruptive effect every bit as big as in other industries that have gone digital, such as office equipment, telecoms, photography, music, publishing, and films.
" Manufacturing is becoming much more efficient requiring fewer workers to produce a growing amount of goods.
Decreasing labor costs as a percentage of overall costs reduces the advantage of lower wage countries.
While factory workers in the U.
S.
are still paid much more than their emerging market counterparts, they also generally produce much more because of the greater automation in U.
S.
factories.
Companies are also discovering the benefits of having their manufacturing close to their design group and to the end consumer.
Having the product design engineers close to the plant allows greater collaboration resulting in a better manufacturing process and quicker time to market.
Being closer to the end consumer allows companies greater flexibility, better inventory management, and the ability to respond more quickly to changing customer needs.
As a result, many companies are considering bringing manufacturing back to the U.
S.
for some high value-added, less labor intensive products destined for the U.
S.
market.
On the other hand, labor intensive, low value added products are unlikely to be produced in the U.
S.
again.
Even with America's improved competitiveness, hurdles still remain.
The United States suffers from a shortage of skilled production workers, which could limit growth in the manufacturing sector in the near term.
Another significant obstacle is America's corporate tax rate, which is one of the highest in the world.
Additionally, if the U.
S.
decides to raise taxes on small businesses and corporations, that would discourage companies from moving manufacturing here.
Overly restrictive environmental regulations on shale gas production could also diminish the tremendous opportunity created by cheap energy.
Rising health care costs and uncertainty in the current legislative environment are additional obstacles.
The United States could accelerate this manufacturing trend back to the U.
S.
by creating more incentives for companies to keep or bring their manufacturing here to compete with other countries.
The return of manufacturing to the U.
S.
is just beginning and could last for many years.
Cheap energy from shale natural gas coupled with advances in manufacturing and increasing wages overseas are making the U.
S.
a much more compelling manufacturing location.
Increased efficiencies means new plants create fewer jobs, but there is a multiplier effect.
Studies estimate that each new manufacturing job creates three additional new jobs.
Just as plant closings had a detrimental effect on many of the rust belt cities like Detroit over the last couple of decades, expanding and opening new plants will help rejuvenate local economies.
Over the long term the return of manufacturing to America is one of the reasons we believe the U.
S.
economy is better positioned than many others and one of the reasons we have increased our allocation to U.
S.
stocks over the last couple of years.