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Whatever Happened to the “China Price”?

Posted By Jeff Moad, April 29, 2014 at 12:34 PM, in Category:

When I was growing up, any product with a “Made in Japan” label was assumed to be cheap and of much lower quality than a comparable product made in the U.S.

It took many years—and a good deal of breakthrough process innovation work on the part of Japanese manufacturing leaders—before that perception changed. Now, of course, it has—with occasional exceptions--been reversed.

Similarly, for several years, it has been the assumption that manufacturing costs in China were so much lower than in developed countries that manufacturers-- particularly in the U.S. and Western Europe--would have little choice but to offshore production there. Articles such as this one which ran in BusinessWeek in 2004 bemoaned the “China Price,” product prices so low that manufacturers located in higher-cost countries simply could not compete. The alternative to offshoring to China, this article stated, “is to stay at home and fight -- and probably lose.”

Now those assumptions, too, seem to be in the process of changing. But what’s new is how fast both the perception and the reality of changes in relative global production costs have come about. A new study of global manufacturing costs by The Boston Consulting Group finds that, just since 2004, China’s cost advantage over the U.S. has dropped from 14% to just 5%. And, if current trends continue, BCG predicts, U.S. manufacturing will be less expensive than China’s by 2018.

The BCG study places China, along with Brazil, Russia, France, and Italy, among those it says are under pressure or losing ground to countries such as the U.S., the U.K., Indonesia, India, and Mexico. In fact, the study says Mexico now has lower average manufacturing costs than China.

The reasons for these shifts in the global manufacturing cost picture are, by now, well-known: rapidly escalating labor costs in China, slow-but-steady increases in the value of the Chinese currency relative to the dollar, and lower energy costs in the U.S.

Of course, such studies should always be taken with a grain of salt. Production costs are different in in each vertical industry. And, as firms such as BCG have been telling us for a while now, a lot more goes into determine total production costs than labor and energy costs.

It should be noted, for example, that the BCG study only looked at four data points in compiling what it called its Global Manufacturing Cost-Competitiveness Index: wages, productivity growth, energy, and currency exchange rates. But what about regulatory and legal costs, heathcare costs, product quality, and workforce quality? BCG chose not to look at those.

Still, the study does show clearly that the global manufacturing cost picture is changing rapidly. So rapidly, in fact, that manufacturing leaders will be more challenged than ever to make plant siting decisions that they will have to live with for the next 25 years or more.

And the study also suggests something else: At least for the foreseeable future, low-cost manufacturing will not be concentrated in one country or one region as has been the assumption. Instead, going forward, countries in several regions of the world will be able to produce a wide range of products on a globally price-competitive basis.

This suggests that, rather than pursuing a centralized production model—with outsourced plants in China producing goods for distribution to the rest of the world, more manufacturers will opt for a distributed model, with plants in multiple low-cost centers producing products for regional distribution.

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit

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Excellent article by Jeff.
One important point that Jeff and BCG appear to have ignored is the "hidden" costs or costs that represent the difference between manufacturing cost and Total Cost of Ownership (TCO). For manufacturing to return to the U.S. from China, the manufacturing cost here does not have to equal China's. Rather the manufacturing cost here has to get within about15 to 20% of the Chinese cost. That difference will be balanced by savings on: duty, freight, packaging, carrying cost of inventory, IP risk, impact on innovation of separating mfg. from engineering, trael cost, etc.
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