THE TIPPING POINT



The year 2015 will mark the beginning of a “tipping point” where bringing the supply

chain closer to home will outweigh the previous cost advantages of producing

in China.

Building on their previous work last year, Boston Consulting Group released its most recent report confirming outsourcing losing its cost advantage for American companies.  Last August, BCG gave its first release of findings that wages in China- the chief motivator of off-shoring- were increasing by 15 to 20 percent annually.  At that rate, the labor-deficit in cost would shrink to 39 percent of an advantage for China by 2015; not a number most companies would bite on as a savvy move:

“Wage and benefit increases of 15 to 20 percent per year at the average Chinese factory will slash China’s labor-cost advantage over low-cost states in the U.S., from 55 percent today to 39 percent in 2015, when adjusted for the higher productivity of U.S. workers. Because labor accounts for a small portion of a product’s manufacturing costs, the savings gained from outsourcing to China will drop to single digits for many products.”

The previous report in October added to this with a more specific analysis of exactly what types of industry would be relocating jobs and business back stateside:

“In addition to transportation goods, electrical equipment/appliances, and furniture, the sectors most likely to return are plastics and rubber products, machinery, fabricated metal products, and computers/electronics.  Together, these seven industry groups could add $100 billion in output to the U.S. economy and lower the U.S. non-oil trade deficit by 20 to 35 percent, according to BCG.” –

A recent article in The Economist lists a study that confirms the rising wages of Chinese labor dating from even two years ago:

“China has the world’s largest manufacturing workforce: more than 112m people at the end of 2006, according to Erin Lett, formerly of America’s Bureau of Labour Statistics, and Judith Banister of the Conference Board, who include enterprises in China’s towns and villages…But it is not as cheap as it was. Workers’ compensation rose by more than 9% a year in dollar terms from 2002 to 2006, according to Ms Lett and Ms Banister, and by over 11% in the cities. A new study by Dennis Tao Yang of the Chinese University of Hong Kong, Vivian Chen of the Conference Board and Ryan Monarch of the University of Michigan suggests that Chinese workers, in the cities at least, are now as expensive as their Thai or Filipino peers.” –The next China, The Economist, July 29^th, 2010

The resulting numbers prompt BCG to predict that the year 2015 will mark the beginning of a “tipping point” where cost advantages doing business in China will slow to the point that American companies will begin to reel supply chains back closer to home.

It’s probably wise to emphasize that this is what BCG projects could happen within the next few years.  The release is a cheery read and gives a good summary of not just the numbers but also to a general feeling that companies who have outsourced for the past couple decades now have a lengthy body of long-term data to review, and the overall profit margin for most of them isn’t as impressive as it was supposed to be.   There are two tracks of thought here: one is that cheap labor is worth spreading out your operations, the other is that immediacy of communication among the chain is paramount to your overall bottom line.  I suppose the former works when labor is so dirt cheap you can get people to build your product for a cot and a biscuit a day (I don’t know how your conscience holds up in that scenario, but that appears to be a moot point to everyone these days).  However, it’s my opinion that the latter has more sneaky value because of the overall cost efficiency of your whole business; geography counts for a whole lot when your entire mission is to assemble parts from various locations as well as possible.  That’s just an obvious bonus on every level of your business. 

You could also make a solid argument that the expense going overseas has always been there, and that it took the Recession for American manufacturing to really look at the actual numbers involved in how much a stretched supply chain actually costs.

All in all, the numbers could be heralded as good news to those who believe rising wages in China translate directly to a flood of jobs back to the States.  It is important to note, however, that off-shoring was a trend exacerbated from globalization and the global economy isn’t going away here.  China may have lost its luster from a labor perspective, but that does not at all in any way mean it is not a major player here to stay.  China’s heavy dependence on exports and sheer volume of available labor all but guarantees its position as a chief importer, to say nothing of the Chinese government’s manipulation of its currency.  Even if jobs do leave, they’re likely to end up in Mexico or Korea before coming back here.  The US is doing its best to stay competitive for the work, but if we want more domestic jobs, a strategy to create new work will be more realistically viable than trying to lure old ones back.

Donal Thoms-Cappello is a freelance writer for Rotor Clip Company.