For the past few decades, American companies have been moving their manufacturing facilities overseas to emerging markets, such as China, in search of lower costs.
Manufacturers have an array of attractive options around the world when deciding where to invest, conduct research, build new facilities and create jobs. Sadly, due to former trends, policymakers too often choose policies that put manufacturing in America at a disadvantage, primarily in labor costs.
Former trends relating to overseas labor and shipping costs have begun to change in America’s favor. Companies, such as General Electric have started moving manufacturing from China back to their factories in the US. What companies are beginning to find is that the price to manufacture in overseas is beginning to cost the same amount, if not more than it would be to manufacture in America. This is due to an increase in the emerging markets labor and freight costs, the low-cost natural gas within the United States, and new automated technologies.
According to a survey conducted by Harvard Business School, many firms are still deciding against basing activities in America because they thought wages abroad were lower than at home. However, over the past decade wages in low-cost countries have soared. The Hackett Group’s head of research, Michel Janssen states that, “The offshoring of manufacturing is now rapidly moving towards equilibrium.”According to the International Labour Organisation, real wages in Asia between 2000 and 2008 rose by 7.1-7.8% a year. Pay in advanced economies, on the other hand, rose just 0.5-0.9% a year between 2000 and 2008. Following labor unrest, wages at some factories have gone up steeply. Honda gave its Chinese workers a 47% pay rise after labor strikes in 2010. In addition, wages for senior management in several emerging markets, such as China, Turkey and Brazil, now either matches or exceeds that in America and Europe.
China is well known for having the world’s best supply chains of components for industries. Established infrastructure in China allows their supply chain to function well, since firms have already invested heavily in being there.
Though companies are already established abroad, rising shipping costs make nearshoring more attractive. Companies like IKEA have opened its first factory in North America as a way to cut delivery costs. Nearshoring dramatically decreases turnaround times and increases customer responsiveness, which makes the supply chain more predictable. Being physically close to customers is also very positive for innovation.
The cost of oil is volatile. Especially when there are conflict zones in major producing areas such as the Middle East. This week alone there was an 8% fluctuation in the price of crude oil. A sudden increase in the cost of crude oil will give manufacturers a serious financial hit. Natural gas, on the other hand, is less volatile which leads to known input costs. The development of natural gas sources in the US means that transportation costs of fuel are significantly reduced, leading producers to have significantly lower domestic manufacturing costs.
Over the last decade, new automation technology has been developed and matured so that it can increase productivity and requires fewer but more skilled workers. Inexpensive sensors, fast computing, robotics and other new technologies have led to new user-friendly factory automation that shifts the focus from ensuring low labor costs to finding skilled workers. Disney is developing 3-D printed lighting for interactive toys, and says that in the future the interactive devices inside such toys may be printed rather than assembled by hand. Additive manufacturing machines can be left alone to print day and night. Robots are also already making a difference to the share of labor in total costs. Baxter, a new generation of robot made by Rethink Robotics, an American firm, costs $22,000 a piece and is so safe and simple that an unskilled worker can teach it to operate right next to real people.
As soon as this year, says Hal Sirkin, a consultant at BCG, it will cost about the same to manufacture goods for the American market in certain parts of America as in China in many industries, including computers and electronics, machinery, appliances, electrical equipment and furniture.
Advanced MP Technology is excited to see how the future for manufacturing will change the way the supply chain functions. We work with manufacturers globally and are focused on finding the best value for our customers.