Some news reports and recent developments have me thinking once again about low-cost countries and whether it really is advantageous to outsource manufacturing to China.
The first development was that, as reported in an Industryweek article, a wave of labor strikes has taken place in China in recent months. Most recently, thousands of workers at a plant in eastern China owned by South Korea’s LG Group were on strike protesting the amount of year-end bonuses. Amid complaints that South Korean employees of the factory, which makes screens for electronic products, received higher bonuses, some 600 workers walked off the job at the plant in December. That number later grew to more than 2,000 workers over the course of the strike. After three days, the strike ended when the company raised year-end bonuses from one month’s salary to two months’ salary.
News of labor strikes in China doesn’t really come as a surprise because it is a continuing challenge. As was previously discussed here and here, the result of increasing wage rates in China is that those rates are now only about 30 percent cheaper than rates in low-cost U.S. states. As research from Boston Consulting Group shows, since wage rates account for 20 percent to 30 percent of a product’s total cost, manufacturing in China will only come out to around 10 percent to 15 percent cheaper than is possible in the U.S.—and that’s before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits, or it may even be erased entirely, according to the firm.
In an update to that conclusion, I was interested in a Supply Chain Digest headline that pointed me to some research from AlixPartners indicating that China is expected to remain a leading low-cost country for the foreseeable future due to its mature manufacturing infrastructure and the significant costs of moving production. However, since 2007, the competitive landscape for outsourcing has shifted significantly to favor Mexico, some locations in Europe, and several locations in Asia other than China.
What’s more, according to the AlixPartners’ “2011 U.S. Manufacturing-Outsourcing Cost Index,” Mexico had the lowest landed costs for U.S. customers while other key low-cost countries, including India, Vietnam, and Russia, had higher costs but remained more competitive than China. Looking ahead, as key general manufacturing cost drivers stabilize at more economically sustainable levels after the recession, the firm expects low-cost countries’ advantages over the U.S. will decline. While Asian low-cost countries will likely be more effected than Mexico, China may experience particular negative pressure on landed costs due to wage inflation, exchange-rate pressures, and higher freight rates.
No single factor by itself is likely to shift the cost advantage in favor of the U.S. over China. However, AlixPartners’ research shows that a combination of wage inflation, exchange-rate pressures, and higher freight rates could well erase some—or possibly all--of China’s cost advantage over the next four to five years. That situation, the firm points out, highlights the need for flexible strategies and constant diligence when implementing an aggressive global supply chain strategy.
What I’d like to know, is what you think of the situation. Has your company been effected by wage inflation, exchange-rate pressures, and higher freight rates in China? Secondly, does your company make use of locations in other countries, such as Mexico, India, and Russia? If so, do you see them becoming increasingly important in coming years?