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Wednesday, May 1, 2013

The Manufacturing Cost Components For A Bunch Of Different Things

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Wednesday, May 1, 2013
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The Manufacturing Cost Components For A Bunch Of Different Things

One of the big economic stories in the world is the American manufacturing renaissance.  The theory is simple.  Falling domestic energy costs and rising overseas labor costs will encourage manufacturers to bring production back to the U.S.

While the statements about labor and energy costs could bring back some of manufacturing at the margin, economists are warning us that it is unlikely to cause a wave of reshoring.

The truth is energy and labor are relatively small components of manufacturing costs.  Morgan Stanley analysts point this out in a new report:

Let’s put the importance of labor costs in its proper perspective. It may be surprising to note that labor accounts for a relatively small 16% of total manufacturing costs in the US. This moves as high as 30% for certain sectors such as electronics and apparel, to as low as 6-7% for sectors such as Motor Vehicles, where capital costs are so much more significant. Raw materials and components are clearly the biggest drivers of input costs.
...
This US natural gas “dividend” clearly has broad implications for the manufacturing industries to the extent that natural gas and energy costs are a significant component of cost. This is certainly the case for sectors such as Chemicals, Paper and Aluminum where total energy prices range from 5-9% of total material cost. However, we highlight that energy-intensive sectors only account for ~25% of total US industrial output    For the bulk of sectors, energy is a relatively minor influence, accounting for just 2% of COGS and just 1-2% for sectors such as Electrical Equipment, Machinery, Electronics, Transportation Equipment and Autos.

Here's a chart:

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