Producing in the Southern U.S. Rather Than in China
Published in Alternatives Economiques
(France) on 10 November 2011
by Marc Mousli (link to original)
(France) on 10 November 2011
by Marc Mousli (link to original)
Translated from
by Rachel Towers.
Edited by Drue Fergison.
For American manufacturers the idea of producing in the United States no longer seems completely ridiculous and North Carolina and Alabama stand a chance against Shenzhen and Nankin.
And what if insourcing from low-cost countries wasn’t the natural reflex?
“Twenty years ago we were in the process of moving every appliance manufacturing job to China or Mexico. [But]…when I open up the safe under my desk I can’t find the pennies we have saved…So, the next generation of products is going to be made in the U.S.”
In October 2010, this interview with Jeff Immelt, CEO of General Electric, attracted the attention of fond observers of “weak signals,” announcing a possible trend shift.
As of recently, American industry leaders are no longer dismissively waving their hands at the idea of manufacturing in the U.S. There are numerous reasons for this, including increasing salary costs in China, the high cost of oil, the probable reevaluation of the renminbi and the prohibitively high costs of real estate in regions such as Guangdong (Shenzhen) or the Yangtze Delta.
We can also add frequent delay and quality issues in Chinese factories and, last but not least, all things being equal, the sight of a “Made in the USA” stamp just looks better than “Made in China.”
All of this explains why GE has moved a water-heating factory to Kentucky and why it’s either implanting or developing teams in Alabama, Tennessee and Indiana.
For the same reasons, General Motors is considering reintroducing an assembly line to Springville, Tennessee that was outsourced a few years back. With this operation, the American manufacturer is following in the footsteps of several others: Honda, Kia, Toyota, Nissan, Mercedes-Benz, Hyundai, Volkswagen and BMW are all already located in Alabama, Tennessee, Mississippi, Georgia, Kentucky and the Carolinas.
“Made in America, Again”
Boston Consulting Group just published a study titled, “Made in America, Again: Why Manufacturing Will Return to the U.S.,” which addresses this “insourcing” movement. The famous consulting firm gives two pieces of advice to industry leaders. First, “undertake a rigorous, product by-product analysis of their global supply networks that fully accounts for total costs,” and second, “for many products that have a high labor content and are destined for Asian markets, manufacturing in China will remain the best choice because of technological leadership or economies of scale. But China should no longer be treated as the default option.”
The Rising Cost of the Workforce in China
BCG conducted a detailed examination of the evolution of workforce costs and the real estate industry in China and, more minutely, other factors including customs fees, exchange and transport costs.
Salaries and social contributions in China can only go up, which is good news for everyone. The cost of the working workforce increases on average 20 percent each year, and even more quickly in the most active regions. In 2010, Foxconn doubled the salaries of its Shenzhen site (500,000 workers) after a wave of suicides. And in Foshan (Guangdong Province), Honda’s suppliers had to give raises to at least 30 percent of the workers following a strike.
This trend is happening for two reasons. The first is the need for a qualified workforce, which is going to get stronger with the increasing demand for consumer goods in a country where the quality of life is rapidly improving. The second is that China must undeniably improve the social protection of its workers. The first measures taken by the government are extremely inferior to what is necessary, and the necessary additions would only slightly increase work costs.
Chinese Costs and American Costs: A Shrinking Gap
In 2005, the average cost of a Chinese worker was only 22 percent of the cost of an American worker. In 2010, it increased to 31 percent, and even 41 percent, when taking into account the productivity differential. In 2015 the ratio will be over 60 percent, according to the Boston Consulting Group.
There remains a difference of 40 percent in China’s favor, which is certainly significant, but workforce represents only part of the cost of the final product: from 7 percent for a video camera to 25 percent for an auto part. When we add the increasing price of transportation, customs fees and estimated monetary adjustments, we understand that Jeff Immelt is asking himself if he really needs to spend the time and money in logistical operations that have to go halfway around the world for the smallest product, and run the political, legal, social and administrative risks that are inherent in a country where the behaviors of national, and especially local, leaders are not always predictable.
Business leaders are thus looking toward the southern United States, a true “low cost” zone. Industries there benefit from high quality transportation infrastructure, abundant workforce (well formed and often non-union), university presence, high tech research centers and, above all, an attractive workforce cost. The United Auto Workers (UAW) has accepted substantial cuts in salaries and benefits to bring back jobs. For identical work, an hour of work at $29 in a Michigan factory only pays $14 in Alabama, where the automobile industry employs 135,000 workers, including subcontractors.
Despite this drop, there remains one small difference with China, where the average pay was 8.6 dollars in 2010, and the gap will not be fully filled for several years. The “insourced” industries will not come back the same way they left. They’ll look for further productivity while completely redesigning production processes, and even the products themselves. But a new — and less absurd — distribution of production capacities is in the works. Too bad that the only losers are American workers.
And what if insourcing from low-cost countries wasn’t the natural reflex?
“Twenty years ago we were in the process of moving every appliance manufacturing job to China or Mexico. [But]…when I open up the safe under my desk I can’t find the pennies we have saved…So, the next generation of products is going to be made in the U.S.”
In October 2010, this interview with Jeff Immelt, CEO of General Electric, attracted the attention of fond observers of “weak signals,” announcing a possible trend shift.
As of recently, American industry leaders are no longer dismissively waving their hands at the idea of manufacturing in the U.S. There are numerous reasons for this, including increasing salary costs in China, the high cost of oil, the probable reevaluation of the renminbi and the prohibitively high costs of real estate in regions such as Guangdong (Shenzhen) or the Yangtze Delta.
We can also add frequent delay and quality issues in Chinese factories and, last but not least, all things being equal, the sight of a “Made in the USA” stamp just looks better than “Made in China.”
All of this explains why GE has moved a water-heating factory to Kentucky and why it’s either implanting or developing teams in Alabama, Tennessee and Indiana.
For the same reasons, General Motors is considering reintroducing an assembly line to Springville, Tennessee that was outsourced a few years back. With this operation, the American manufacturer is following in the footsteps of several others: Honda, Kia, Toyota, Nissan, Mercedes-Benz, Hyundai, Volkswagen and BMW are all already located in Alabama, Tennessee, Mississippi, Georgia, Kentucky and the Carolinas.
“Made in America, Again”
Boston Consulting Group just published a study titled, “Made in America, Again: Why Manufacturing Will Return to the U.S.,” which addresses this “insourcing” movement. The famous consulting firm gives two pieces of advice to industry leaders. First, “undertake a rigorous, product by-product analysis of their global supply networks that fully accounts for total costs,” and second, “for many products that have a high labor content and are destined for Asian markets, manufacturing in China will remain the best choice because of technological leadership or economies of scale. But China should no longer be treated as the default option.”
The Rising Cost of the Workforce in China
BCG conducted a detailed examination of the evolution of workforce costs and the real estate industry in China and, more minutely, other factors including customs fees, exchange and transport costs.
Salaries and social contributions in China can only go up, which is good news for everyone. The cost of the working workforce increases on average 20 percent each year, and even more quickly in the most active regions. In 2010, Foxconn doubled the salaries of its Shenzhen site (500,000 workers) after a wave of suicides. And in Foshan (Guangdong Province), Honda’s suppliers had to give raises to at least 30 percent of the workers following a strike.
This trend is happening for two reasons. The first is the need for a qualified workforce, which is going to get stronger with the increasing demand for consumer goods in a country where the quality of life is rapidly improving. The second is that China must undeniably improve the social protection of its workers. The first measures taken by the government are extremely inferior to what is necessary, and the necessary additions would only slightly increase work costs.
Chinese Costs and American Costs: A Shrinking Gap
In 2005, the average cost of a Chinese worker was only 22 percent of the cost of an American worker. In 2010, it increased to 31 percent, and even 41 percent, when taking into account the productivity differential. In 2015 the ratio will be over 60 percent, according to the Boston Consulting Group.
There remains a difference of 40 percent in China’s favor, which is certainly significant, but workforce represents only part of the cost of the final product: from 7 percent for a video camera to 25 percent for an auto part. When we add the increasing price of transportation, customs fees and estimated monetary adjustments, we understand that Jeff Immelt is asking himself if he really needs to spend the time and money in logistical operations that have to go halfway around the world for the smallest product, and run the political, legal, social and administrative risks that are inherent in a country where the behaviors of national, and especially local, leaders are not always predictable.
Business leaders are thus looking toward the southern United States, a true “low cost” zone. Industries there benefit from high quality transportation infrastructure, abundant workforce (well formed and often non-union), university presence, high tech research centers and, above all, an attractive workforce cost. The United Auto Workers (UAW) has accepted substantial cuts in salaries and benefits to bring back jobs. For identical work, an hour of work at $29 in a Michigan factory only pays $14 in Alabama, where the automobile industry employs 135,000 workers, including subcontractors.
Despite this drop, there remains one small difference with China, where the average pay was 8.6 dollars in 2010, and the gap will not be fully filled for several years. The “insourced” industries will not come back the same way they left. They’ll look for further productivity while completely redesigning production processes, and even the products themselves. But a new — and less absurd — distribution of production capacities is in the works. Too bad that the only losers are American workers.