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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.
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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.” –
“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 29th, 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.
