US Manufacturing Cost Comparison to China: Labor Cost is Just One Factor of Many
September 28th, 2008
The reason typically given for why companies have moved factories offshore is labor cost, but I can tell you from 20 years in international business, including extensively in China, that there are other factors that are just as important.
Rather than actually move a factory, it is much more likely to subcontract to a manufacturing in another countries, particularly China, to make the product.
Yes, the hourly cost of labor is less, but also the subcontractor can bid low on offering to build products because they have very low standards for safety and environmental protection. They are also often in with local officials and know the ropes on getting around what laws do exist in countries like China. Local official corruption may sound like an added cost for those contractors, but actually it helps them reduce cost on many fronts, like avoiding import tariffs on raw materials and even getting subsidized prices for the electricity or oil they use, etc.
These advantages do come back to haunt companies that use such services, as the toy makers found out with the lead contamination and pet food makers with the melamine contamination that poisoned thousands of pets here in the USA and has been the cause of the baby formula disaster in China, where 50,000 babies were recently sickened after consuming melamine laced dairy (melamine makes products appear to have higher amounts of protein).
Having more recently can also be an advantage in many manufacturing areas, for example, if an American factory to build a product was started 20 years ago, it could still be using dated manufacturing equipment today. The subcontactor’s new factory is using newer tooling and assembly equipment. This is not always the case, or an advantage, but it can be significant in some industries, like reducing steps involved, lower energy costs, potentially needing fewer skilled workers. However, as the American factory updates (if it does and if it stays open), this edge will be regained here in the USA, as we start using even newer equipment.
The US does have key advantages – we are by far the biggest market in the world, so producing here means less transit time and cost, and better flexibility. I can literally call my jeans supplier, and they can literally make and ship product within a couple days. Ordering from China would typically mean filling cargo containers, putting them on a boat, and hoping what was really ordered shows up in a few months.
Another advantage is our workers are highly skilled, hard working, and flexible. Theirs are often willing to do 12 hours a day, six days a week, have no real unions, weak labor laws, and a police state to deal with any opposition. Nevertheless, if it were just labor hourly wage cost, many more factories here in the USA would still be open. Forced to go to extreme low prices by retail customers, like Wal-Mart, many manufacturers end up finally going to China in spite of the many issues. The ability of subcontractors to take advantage of local Chinese workers and practically ignore safety and pollution standards is the cost tipping point, and in my opinion unfair advantages that should be considered before imports are allowed.
The final factor we are too often lacking is executive loyalty. Labor costs are extremely high in Japan, yet Toyota invests over twice as much in their home country than they do in their biggest market – the US. They could close Japanese factories and move them to China for export to America and it would probably save several thousand dollars per vehicle, but they don’t. Why? In spite of being international, they know they are Japanese and loyal to their own country. Compare that to Wal-Mart, who imports over $50 billion in cheap goods from China alone. Our American executives are sometimes that loyal, but all too often ready to run to the exit at a moment’s notice. When did becoming an international company equate to no loyalty of many American companies to the USA? I can add with my extensive international experience that no other country’s executives take the extreme view that their country does not matter. We could have never come together to fight and win World War II with that kind of shortsighted, ignorant view. The lack of loyalty is not only wrong, it’s embarrassing. As American business people, we must consider the effect of decisions on America.
Todd Lipscomb
Founder of MadeinUSAForever.com (http://madeinusaforever.com/toptenreasons.html) a source for USA made products and information
Sunday, September 28th, 2008 at 7:05 amand is filed under Uncategorized.
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This is an excellent piece