Overseas Manufacturing

[The Mad Monk]

They're working for $1.75 an hour nowadays.

[The Mad Monk]

* May 05, 2011
*
Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring
* Reinvestment During the Next Five Years Could Usher in a ‘Manufacturing Renaissance’ as the U.S. Becomes a Low-Cost Country Among Developed Nations, According to Analysis by The Boston Consulting Group

CHICAGO, May 5, 2011—Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world, according to a new analysis by The Boston Consulting Group (BCG).

With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

Products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas.

“Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs. They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother—and that’s before taking into account the added expense, time, and complexity of logistics,” said Sirkin, whose most recent book, GLOBALITY: Competing with Everyone from Everywhere for Everything, deals with globalization and emerging markets.

Indeed, a number of companies, especially U.S.-based ones, are already rethinking their production locations and supply chains for goods destined to be sold in the U.S. For some, the economics have already reached a tipping point.

Caterpillar Inc., for example, announced last year the expansion of its U.S. operations with the construction of a new 600,000-square-foot hydraulic excavator manufacturing facility in Victoria, Texas. Once fully operational, the plant is expected to employ more than 500 people and will triple the company's U.S.-based excavator capacity. “Victoria’s proximity to our supply base, access to ports and other transportation, as well as the positive business climate in Texas made this the ideal site for this project,” said Gary Stampanato, a Caterpillar vice president.

NCR Corp. announced in late 2009 that it was bringing back production of its ATMs to Columbus, Georgia, in order to decrease the time to market, increase internal collaboration, and lower operating costs. And toy manufacturer Wham-O Inc. last year returned 50 percent of its Frisbee production and its Hula Hoop production from China and Mexico to the U.S.

“Workers and unions are more willing to accept concessions to bring jobs back to the U.S.,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Support from state and local governments can tip the balance.”

Zinser noted that executives should not make the mistake of comparing the average labor costs for production workers in China and the U.S. when making investment decisions. The costs of Chinese workers are still much cheaper, on average, than comparable U.S. workers, and some managers may assume that China is a better location. But averages can be deceiving.

“If you’re just comparing average wages in China against those in the United States, you’re looking at the problem in the wrong way,” Zinser cautioned. “Average wages don’t reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today.”

“In the U.S., we have highly skilled workers in many of our lower-cost states. By contrast, in the lower-cost regions in China it’s actually very hard to find the skilled workers you need to run an effective plant,” added Doug Hohner, another BCG partner who focuses on manufacturing.

Even as companies reduce their investment in China to make goods for sale in the U.S., it is clear that China will remain a large and important manufacturing location. First, investments to supply the huge domestic market in that nation will continue. Second, in the absence of trade barriers that prevent offshoring, Western Europe will continue to rely on China’s relatively lower labor rates since the region lacks the flexibility in wages and benefits that the U.S. enjoys.

Third, even though other low-cost countries—such as Vietnam, Thailand, and Indonesia—will benefit from companies seeking wage rates that are lower than China’s, only a portion of the demand for manufacturing will shift from China. Smaller low-cost countries simply lack the supply chain, infrastructure, and labor skills to absorb all of it, Hohner noted.

The BCG analysis is part of an ongoing study of the future of global manufacturing that the firm's Global Advantage and Operations practices are conducting.

http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-75973

[Ogie Oglethorpe]

While the wage rate disparity is often creditted for the movement of industry off shore, I find the real reasons people will continue to do business in preference with China et. al. is not that the labor is cheaper per se but (that despite the longer supply chain) the ability to make changes midstream.

As an example, when a fab shop for circuit boards runs up against a permitting delay in the US of upwards of 2 years before they can even break ground (for an item that realistically has a product lifecycle and more importantly a profitability window on the same time scale) let alone think about comissioning and operating.

Why would someone think the US is going to get manufacturing back, when foreign based green field shops can be erected sans permitting delays in a matter of months? If a manufacturer decided to be US supplied, his competitors would easily be able to out innovate by bringing multiple generations of product to market before the gen 1 US version even rolled out of the fab shops.

The biggest advantage is not the absolute labor costs but more importantly how willing the society is to make the changes, one of the biggest drivers in that area is the extent to which government inhibits flexibility/change.

This is not to say that the anecdotal "run your laborers into the ground to make things happen" stories are not indicative of a cultural mindset. However, that kind of flexibility only becomes apparent once the decision has already been made to go offshore. The driver for making that decision in the first place is the inability to get things done in the US at the outset.

[PLATO]

So what happens if the US puts a massive tariff on Chinese goods?

Massive inflation.
Collapsed Dollar.
American Economic Depression.
Chinese world domination.

In that order.

[giblets]

Massive inflation.
Collapsed Dollar.
American Economic Depression.
Chinese world domination.

In that order.

I'm not so sure about the last one.

[Hauldren Collider]

The USA are not a nation state.

How's this relevant?

[rah]

Everything goes in cycles.

I remember twenty years ago, when Call centers always looked at Omaha, Neb to set up shop because the labor there was cheap and they had invested a lot in their communications infrastructure. Their success in this area led to a stampede of companies relocating their call centers there. But eventually, due to demand, the labor costs started rising, especially for experience supervisors and managers. The savings started to evaporate but their infrastructure kept it going a while longer. To no ones surprise, other depressed areas in the US were able to compete with lower rates, and eventually other countries got into the game.

Costs are rising in China which will eventually move a lot of business to less developed countries where it is even cheaper. (granted after some infrastructure upgrades)
There will be a window for the US to reclaim a SMALL part of the business where the manufacturing cost differences can be offset by reduced delivery costs.

[Ogie Oglethorpe]

There will be a window for the US to reclaim a SMALL part of the business where the manufacturing cost differences can be offset by reduced delivery costs.

I doubt it given the other thread discussions on promulgation of number and complexity of regulations and if so it will be indeed SMALL.

[rah]

There was a reason I capitalized SMALL. But I think it will be a bit more than you think.

[onodera]

How's this relevant?

That's very relevant, as the bloody history of European wars over mixed-population border areas shows.

[DaShi]

Those jobs aren't coming back. Learn a new trade or better create one.

[PLATO]

I'm not so sure about the last one.

Normally I would agree with you, but as long as the world allows China to control its exchange rate and with the reserves that China has, it seems the logical conclusion that they would end up dominating the world economy in the event of a collapsed dollar and an economic depression in the U.S.

The only possible way that I see this not happening would be for the Euro to become the world reserve currency and for a quite remarkable recovery in Europe take place...neithier event which I think is likely given the overall European economic condition.

[giblets]

When China controls its exchange rate all it does is print yuan and exchange them for foreign currency, IIUC. Can a country really dominate the global economy by printing money?

[onodera]

When China controls its exchange rate all it does is print yuan and exchange them for foreign currency, IIUC. Can a country really dominate the global economy by printing money?

One has certainly tried.

[KrazyHorse]

When China controls its exchange rate all it does is print yuan and exchange them for foreign currency, IIUC. Can a country really dominate the global economy by printing money?

No.