{"id":84,"date":"2010-09-14T17:36:36","date_gmt":"2010-09-15T00:36:36","guid":{"rendered":"http:\/\/savingusmanufacturing.com\/blog\/?p=84"},"modified":"2010-09-14T17:47:50","modified_gmt":"2010-09-15T00:47:50","slug":"is-outsurcing-to-china-losing-its-luster","status":"publish","type":"post","link":"https:\/\/savingusmanufacturing.com\/blog\/general\/is-outsurcing-to-china-losing-its-luster\/","title":{"rendered":"Is Outsurcing to China Losing its Luster?"},"content":{"rendered":"

Outsourcing to China or setting up manufacturing plants in China has offered a variety of advantages to businesses over the past decade, ranging from reduced wages to lower costs from less stringent environmental and regulatory compliance.\u00a0 The question is whether these advantages will continue to make China more attractive than expanding in the United States.\u00a0 The challenge for multinational companies will be to design a global footprint and determine which business processes are best suited to outsourcing and which should remain in the United States.\u00a0 The question for smaller companies is whether outsourcing to China is worth the time, effort, and risk.\u00a0 The decision process is often a balancing act, and the dynamics can change unexpectedly and rapidly.\u00a0 The dynamics began to change in 2005 and will continue to change over the next several years.<\/p>\n

Four years ago, Business Week<\/em> ran a story, \u201cHow Rising Wages are Changing the Game in China\u201d that noted that in 2005 wages surged 40 percent.\u00a0 In 2007, the wages in China rose another 30 percent and have continued to rise an average of 15 percent a year since a 2008 labor contract law went into effect January 2008.<\/p>\n

Thirty years of pro-market reform and explosive economic growth made China into a manufacturing superpower.\u00a0 But now China may be facing the inevitable consequence of that economic ascendance \u2014\u00a0 labor unrest.\u00a0 In recent months, a wave of strikes in China has hit Japanese companies and their suppliers.\u00a0 The strikes affected more than 100 companies, including Honda Motor Company and Toyota.\u00a0 The strikes were concentrated in southern China, which produces many of the country\u2019s exports.\u00a0 The strikers mostly belonged to China\u2019s 150 million strong migrant labor workforce, which flows from villages to cities and industrial regions looking for work.<\/p>\n

Foxconn Technology Group, which is the world\u2019s largest contract manufacturer of electronics goods such as iPhone and iPads, more than doubled the basic worker pay to 2,000 yuan ($293) a month for their Chinese workers after ten worker suicides.\u00a0 Foxconn<\/a> plans to charge more for their products and will speed up factory automation programs to cover wage increases.<\/p>\n

Marc Chandler<\/a>, global head of currency strategy at Brown Brothers Harriman, opines that Fordism may be coming to China.\u00a0 Fordism refers to a type of political economy, which recognizes that despite great disparities in power, workers need to earn high enough wages to purchase the products they create in order to complete circuit of production.<\/p>\n

The second force pushing wages higher is that the supply of migrant workers has reportedly fallen by 20 percent from its peak.\u00a0 As a result, some companies are moving production to the interior of China where many migrant workers come from to secure lower wage workers.\u00a0\u00a0 In addition, the working age of the Chinese population, laborers between the ages of 15 and 64, peaked this year.\u00a0 This birth bulge was a major reason that China instituted its One Child policy 30 years ago.\u00a0 Thus, with every passing year, the number of workers in that age group will shrink in size.<\/p>\n

The effect of higher wages will only have a significant impact if the labor content of a product manufactured or assembled in China is high compared to cost of raw materials and components.<\/p>\n

Makers of toys, trinkets, Christmas trees, and cheap shoes have folded by the thousands or moved away to Vietnam, Indonesia, or Cambodia.\u00a0\u00a0 However, even with higher wages, Chinese wages are estimated to be about three percent of manufacturing wages in the U. S.<\/p>\n

Another factor is that the rising cost of fuel has increased shipping costs by 71 percent over the past four years.\u00a0 Delivery times have also increased because container-shipping companies have reduced routes and reduced the number of ships per route.\u00a0 The ports in Asia are filling up with decommissioned freighters.<\/p>\n

The August 18, 2010 issue of \u201cToday\u2019s Machining World\u201d reported that Wham-O Corporation, maker of Frisbees, Hula Hoops, and Slip \u2018n Slide, decided to bring half of its Frisbee production and some production of its other products back to the United States.\u00a0 Wham-O\u2019s products take up a lot of container space per dollar value.\u00a0 These products are not labor-intensive, primarily produced by injection molding presses.\u00a0 They are cheap, light, and bulky so a container of Frisbees may hold only $5,000 worth of product.\u00a0 When container costs from China rose by 50 percent to $4,500 from as low as $3,000 at the bottom of the recession, the cost advantage of manufacturing in China disappeared according to Kyle Aguilar, President of Wham-O.<\/p>\n

Higher labor costs and higher shipping costs aren\u2019t the only factors contributing to China losing its luster as an outsourcing location.\u00a0 Quality problems are the number one factor bringing some manufacturing back to the United States.\u00a0 Quality control issues have the potential to cost companies millions in terms of lost customers, potential litigation, and the logistics of shipping a defect product back to where it came from (if the Chinese company will take it back and give credit).\u00a0 General Electric, Caterpillar, NCR, and Diagnostic Devices have all moved production back to the U. S. for one reason or another.<\/p>\n

The quality problems with products made in China are demonstrated by the product recalls by the Consumer Product Safety Commission week after week, month after month, and year after year.\u00a0 For example, in the August 2010 list of product recalls, 70.8 percent \u2013 17 of 24 \u2013 were for products made in China.\u00a0 Only one product recall was for a product made in USA.\u00a0 This ratio of recalls of Made in China to Made in USA products is roughly the same report after report.<\/p>\n

There is no question that outsourcing to China and other countries will continue for the foreseeable future, especially for the multinational companies that have products to sell within the countries in which they have set up manufacturing operations.\u00a0 Manufacturing products locally for consumption within a foreign country will be crucial to profitability as transportation costs continue to increase globally.<\/p>\n

The best locations for outsourcing will change over time just as they have in the past 50 years.\u00a0 The purely financial benefits of lower cost in China will erode over time.\u00a0\u00a0 The challenge for Americans is how to keep as many companies as possible manufacturing their products in the United States in order to maintain our middle class and protect our national security.<\/p>\n","protected":false},"excerpt":{"rendered":"

Outsourcing to China or setting up manufacturing plants in China has offered a variety of advantages to businesses over the past decade, ranging from reduced wages to lower costs from less stringent environmental and regulatory compliance.\u00a0 The question is whether these advantages will continue to make China more attractive than expanding in the United States.\u00a0 […]<\/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-84","post","type-post","status-publish","format-standard","hentry","category-general"],"_links":{"self":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/84","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=84"}],"version-history":[{"count":3,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/84\/revisions"}],"predecessor-version":[{"id":86,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/posts\/84\/revisions\/86"}],"wp:attachment":[{"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/media?parent=84"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/categories?post=84"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/savingusmanufacturing.com\/blog\/wp-json\/wp\/v2\/tags?post=84"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}