{"id":231,"date":"2011-08-30T15:47:18","date_gmt":"2011-08-30T22:47:18","guid":{"rendered":"http:\/\/savingusmanufacturing.com\/blog\/?p=231"},"modified":"2011-08-30T15:47:18","modified_gmt":"2011-08-30T22:47:18","slug":"will-you-follow-the-herd-or-be-a-leader","status":"publish","type":"post","link":"https:\/\/savingusmanufacturing.com\/blog\/general\/will-you-follow-the-herd-or-be-a-leader\/","title":{"rendered":"Will You Follow the Herd or be a Leader?"},"content":{"rendered":"<p>When I succumbed to peer pressure as a teen ager and asked my mother if I could do something that \u201ceveryone else was doing,\u201d her refrain would be \u201cdon\u2019t be a sheep and follow the crowd; be a leader.\u201d<\/p>\n<p>The management of American manufacturing companies should have followed my mother\u2019s advice of being a leader in their industry instead of following the \u201cherd mentality\u201d of outsourcing their manufacturing offshore to China to the detriment of the overall American manufacturing industry and the United States\u2019 position as the world\u2019s pre-eminent country.<\/p>\n<p>A new report by the Boston Consulting Group, <em><a href=\"http:\/\/www.bcg.com\/media\/PressReleaseDetails.aspx?id=tcm:12-75973\">Made in America, Again<\/a> \u2013 Why Manufacturing Will Return to the U. S.<\/em>, reveals that \u201cChina\u2019s overwhelming manufacturing cost advantage over the U. S. is shrinking fast.\u201d\u00a0 The authors, Harold L. Sirkin, Michael Zinser, and Douglas Hohner, conclude that within five years, \u201crising Chinese wages, higher U. S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U. S. and China for many goods consumed in North America.\u201d<\/p>\n<p>Their report substantiates the Total Cost of Ownership worksheet calculator that Harry Moser, founder of the <a href=\"http:\/\/www.reshorenow.org\/\">Reshoring Initiative<\/a>, has developed and is teaching to managers of American manufacturers that want to be leaders in bringing manufacturing back to the United States.<\/p>\n<p>The Boston Consulting Group makes the same recommendation as Moser:\u00a0 conduct a rigorous, part-by-part, product-by-product analysis to fully account for total costs rather than just factory wages.\u00a0 In doing so, they may discover that manufacturing in the U. S. is a more attractive option, especially for products sold in the U. S. market.\u00a0\u00a0 For products with high labor content that are destined for mainly Asian markets, manufacturing in China will remain the best choice because of economies of scale or technology.\u00a0 They key idea is to recognize that China is no longer the default option to lower costs and increase profitability.<\/p>\n<p>What is the basis for authors\u2019 conclusion that manufacturing will return to the United States?\u00a0 They say the key reasons for the shift are the following:<\/p>\n<ul>\n<li>Wage and benefits have increased 15 to 20 percent per year at the average Chinese factory, which will slash China\u2019s low-cost advantage over the U. S. from 55 percent today down to 39 percent by 2015, when adjusted for the higher productivity of U. S. workers.<\/li>\n<li>When the Total Cost of Ownership factors such as transportation, duties, supply chain risks, cost of inventory, and other costs are calculated, the cost savings of manufacturing in China rather than some U. S. states will become minimal within five years.<\/li>\n<li>\u201cAutomation and other measures to improve productivity in China won\u2019t be enough to preserve the country\u2019s cost advantage.\u00a0 Indeed, they will undercut the primary attraction of outsourcing to China \u2013 access to low-cost labor.\u201d<\/li>\n<li>Demand of goods in Asia will increase rapidly due to rising income level so multinational companies are likely to devote more of their capacity in China to serving the Asian market and bring some production back to the U. S. to service the North American market.<\/li>\n<li>\u201cManufacturing of some goods will shift from China to nations with lower labor costs, such as Vietnam, Indonesia, and Mexico.\u201d\u00a0 However, this will be limited by the supply of skilled workers, inadequate infrastructure, supply networks, as well as by political and intellectual property risks, corruption, and the risk to personal safety in those countries.<\/li>\n<\/ul>\n<p>The BCG report presents an interesting perspective on the decline and forecast renaissance of American manufacturing.\u00a0 They acknowledge the effect of Japan and the \u201cAsian Tigers of Korea and Taiwan had on the shrinking of the American manufacturing industry, in which the U. S. share of the world\u2019s manufacturing dropped from the high of around 40 percent in the early 1950s down to less than 20 percent today.\u00a0 However, they point out that \u201cU. S. industry and the economy responded with surprising flexibility to reemerge more competitive and productive than ever\u201d by the late 1990s.<\/p>\n<p>They opine that the \u201cU. S. manufacturing sector is today in the midst of a similar process of readjustment in response to perhaps its greatest competitive threat ever?\u00adthe rise of China.\u201d\u00a0 As proof, they state that the \u201coutput of manufacturing is almost two and a half times its 1972 level in constant dollars, even though employment has dropped by 33 percent\u2026the value of\u00a0 U. S. manufacturing has increased by one-third, to $1.65 trillion, from 1997 to 2008?before the onset of the recession?thanks to the strongest productivity growth in the industrial world.\u201d<\/p>\n<p>The authors conclude that within five years, \u201cthe total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U. S. where factories are likely to be built,\u201d such as South Carolina, Alabama, and Tennessee.\u00a0 When you add in the other factors of Total Cost of Ownership, the cost gap will be minimal.\u00a0\u00a0 Although some production is moving to Chinese cities in interior provinces to reduce costs, these regions lack the abundance of skilled workers, supply networks, and efficient transportation infrastructure of the coastal cities.\u00a0 \u201cAs a result, they expect companies to begin building more capacity in the U. S. to supply North America.\u201d\u00a0 A few of their examples are:<\/p>\n<ul>\n<li>NCR moved      production of its ATM\u2019s to a plant in Columbus, Georgia, that will employ      870 people by 2014.<\/li>\n<li>The Coleman      Company is moving production of its 16-quart wheeled plastic cooler from      China to Wichita, Kansas.<\/li>\n<li>Sleek Audio      has moved production of its high-end headphones from Chinese suppliers to      its plant in Manatee County, Florida.<\/li>\n<li>Peerless      Industries will consolidate all manufacturing of audio-visual mounting      systems in Illinois, moving work from China in order to achieve cost      efficiencies, shorter lead times, and local control over manufacturing      processes.<\/li>\n<\/ul>\n<p>These examples corroborate what I\u2019ve been seeing and wrote about in my book and subsequent blog articles about companies in the San Diego region.\u00a0 For example, at a TechAmerica Operations Roundtable event last April, Luke Faulstick, COO of<a href=\"http:\/\/www.djoglobal.com\/en_US\/Home.html\"> DJO Global<\/a> said that they have brought back the manufacturing of their cold therapy unit from China, their printed circuit boards to a supplier in South Dakota, their textile manufacturing to North Carolina, and their screw machined parts to Texas.\u00a0 He recommended that any company on the \u201clean\u201d journey should rethink their outsourcing offshore.<\/p>\n<p>The BCG report goes into quite a bit of detail about the factors that are starting to dramatically shift the manufacturing cost equation in favor of the U. S.\u00a0 A key factor is that China\u2019s average wages have become more volatile.\u00a0 In 2010, \u201cthe giant contract manufacturer Foxconn International, which employs 920,000 people in China alone, doubled wages\u201d after a string of worker suicides.<\/p>\n<p>They assert that rising Chinese productivity will be insufficient to offset these wages increases because output will increase at only half the pace of the rise in wages.\u00a0 Even though Chinese wages will still be much lower in 2015, labor content is only part of the cost of making a part so the savings could shrink to as low as 10 percent when other costs are included.<\/p>\n<p>The price of labor is increasing so rapidly that manufacturers are automating their plants in China to reduce the labor content, but as the labor content is reduced, it reduces the advantage of keeping manufacturing in China for the low labor rates.<\/p>\n<p>Another factor is the increasing cost of land in China for building factories.\u00a0 For example, industrial land costs average $10.22 per square foot, but ranges up to $21 per square foot in Shenzhen.\u00a0 In contrast, industrial land in Alabama ranges from $1.86 to $7.3 per square foot and $1.30 to $4.65 in Tennessee and North Carolina.<\/p>\n<p>Other low-cost nations won\u2019t be able to absorb all of the high labor content manufacturing moving from China because China has the highest proportion of able-bodied adults in the workforce (84 percent), and 28 percent of those workers are employed by industry.\u00a0 The estimated 215 million industrial workers in China are 58 percent more than the industrial workforce of all of Southeast Asia and India combined.<\/p>\n<p>The authors predict that \u201cinstead of pulling out of China, most multinational companies will orient more of their production to serve China and the rest of a growing Asia\u2026 The shifting cost structure between China and the U. S. will present more manufacturing and sourcing options.<\/p>\n<p>U. S. manufacturers should undertake a thorough analysis of their global supply networks, factoring in worker productivity, transit costs, time-to-market considerations, logistical risks, energy costs, as well as other hidden costs of sourcing offshore.<\/p>\n<p>The question is:\u00a0 Are you going to be one of the leaders in bringing manufacturing back to the\u00a0 U. S. or are you going to follow the \u201cherd mentality\u201d by continuing to outsource manufacturing in China?<\/p>\n","protected":false},"excerpt":{"rendered":"<p>When I succumbed to peer pressure as a teen ager and asked my mother if I could do something that \u201ceveryone else was doing,\u201d her refrain would be \u201cdon\u2019t be a sheep and follow the crowd; be a leader.\u201d The management of American manufacturing companies should have followed my mother\u2019s advice of being a leader [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-231","post","type-post","status-publish","format-standard","hentry","category-general"],"_links":{"self":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/231","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/comments?post=231"}],"version-history":[{"count":1,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/231\/revisions"}],"predecessor-version":[{"id":232,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/231\/revisions\/232"}],"wp:attachment":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/media?parent=231"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/categories?post=231"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/tags?post=231"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}