From East to West |
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Sometimes a bargain isn't really a bargain. For years, U.S. companies have moved manufacturing operations to China as a way to reduce costs. New data, however, shows that the perceived benefit of off–shoring to China is growing smaller and smaller. For many industries, manufacturing in China always seemed to carry a 40% cost advantage over U.S. manufacturing based on labor and raw material costs. This "China price" advantage was true for products as diverse as furniture, automotive products and telecom equipment. Now, experts are calculating the “total cost of ownership” which includes not only labor and raw materials but also quality, logistics, and engineering changes – even storage and delays in shipping components and finished product. According to Fred Heegan, a purchasing manager for the North American operations of Japanese auto supplier Takata, “There are significant hidden costs to having supply lines that extend to China.” For example, it takes an average of 45 days for products to be shipped from China to the U.S. by ocean freight. In addition to shipping costs, warehousing expenses can be significant when finished products need to be stored upon arrival. As a result, the China price advantage is no longer as compelling as it once was. In fact, it has virtually disappeared in many industries, according to AlixPartners, a Southfield MI outsourcing firm. In its study, AlixPartners studied five types of machined parts – from large labor–intensive engine components to small plastic components needing little labor. In 2005, Chinese–made parts were 22% cheaper than U.S.–made parts; by 2008, the price advantage was only 5.5% – a cost differential too small in many cases to shift production to China. Other factors play a role in reducing China’s cost advantage. The Yuan has appreciated nearly 11% since 2005 and wages have grown an average of 7– 8% per year. In addition, the Chinese government has eliminated many tax breaks. Does this study herald a return of manufacturing to the U.S.? Not quite. First of all, China remains a manufacturing powerhouse. With average wages of $1.26/hour, the nation remains a top destination for labor–intensive products like toys and clothing. It is also expanding its presence in several key industries including telecom equipment, solar energy and automobiles – the nation is the fastest–growing auto market in the world. Secondly, it is Mexico – not the U.S. – that emerges as the cost–effective location of choice. The study found that goods produced in China are approximately 20% more expensive than those produced in Mexico. More important, Mexico has increased its cost advantage over the U.S. as a manufacturing location – from 16% a few years ago to 25% today. While a shift to Mexico may seem inevitable for some companies, experts warn not to make too drastic a move. “You don’t want to shift everything to Mexico and then see the Yuan drop like a stone, making China cheap again,” says Stephen T.Maurer with AlixPartners. Still, the big winner in the global manufacturing competition no longer appears to be China – it’s Mexico. Editors Note: On July 26, 2009, General Electric Corporation chief executive Jeffrey Immelt urged a national policy to increase U.S. manufacturing jobs from the current 10% of the total workforce to 20%. For more, see the Quotes column in this issue. Source: “So Much for the Cheap ‘China Price,’” by Pete Engardio. Business Week. June 4, 2009. |