The Chinese Jig Is Up

    

There is an interesting – but not too surprising to me or just about anyone else who understands manufacturing in reality, rather than as something that can be completely described in a standard cost calculation – study from the Boston Consulting Group about the shifting and current costs of global manufacturing. Among its conclusions:

The gap between China and the U.S. in overall manufacturing cost – before transportation – is less than 5 points today.”

Put another way, only a fool would manufacture in China unless they plan to sell the output of their production in China. “Before transportation” is huge. Even larger are the enormous wastes resulting from China lead times. Not too long ago there were senior executives and board members who imposed China quotas on their sourcing people … heads would roll if at least X% of their buys came from China. The heads that should roll are those of the execs who came up with such short sighted mandates.

The author of the study summarized it in BusinessWeek, including “As Chinese labor costs rise, American productivity improves, and U.S. energy expenses fall, the difference in manufacturing costs between China and the U.S. has narrowed to such a degree that it’s almost negligible. For every dollar required to manufacture in the U.S., it now costs 96¢ to manufacture in China, before considering the cost of transportation to the U.S. and other factors. For many companies, that’s hardly worth it when product quality, intellectual property rights, and long-distance supply chain issues are added to the equation.”

The past ten years have been marked by high volatility.”

That’s an understatement. Out of control and widely fluctuating exchange rates are a big part of it, and it is very hard to sympathize with those companies that ran off to some backwater place based on some short term accounting analysis, now whining that the unstable economy of that third world morass is driving exchange rates that more than gobble up any labor savings. The instructors at Harvard never taught them to quantify the cost of corruption and instability so they left it out of the equation. Key mistake on their part.

You can pretty well count on legions of academics taking this information and getting to work on models to better predict economic forces – laboring under the absurd and defenseless theory that chasing cheap labor is still the right way to do business and that all manufacturing needs are tools to keep them out of the quicksand of “high volatility”. What makes such theories defenseless is that companies chasing a few percentage points of labor differential are very apt to have 30%, 40% or more of non-value adding waste built into their cost structure. Even more when they look at the entire supply chain.

Taking on the risk of third world manufacturing and exposing the company to the sorts of risks that await them, rather than thoroughly learning and embracing lean principles and going after that non-value adding waste is just plain silly. Manufacturing as close to the customer as you can, with the greatest value adding cost structure you can create is the universal formula for success. There is more to it than that, of course, but producing far from the customer focused only on labor cost is a fool’s game, and the BCG study is serving to expose quite a few fools who went all in on China.

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