Tea Leaf: Renaissance manufacturing (part two)

Published: Wednesday, Feb. 22 2012 1:00 p.m. MST

In this April 28, 2011 photo, a Dodge Durango is assembled at Chrysler's Jefferson North Assembly Plant in Detroit.

Associated Press

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Read part one here.

Last week’s Tea Leaf talked about the rebound in U.S. manufacturing that is both under way and likely to continue. The American manufacturing sector is expected to add jobs in 2012 for the third consecutive year, after years of painful job eliminations. The Tea Leaf also focused on some of the “common wisdoms” about manufacturing, the quality of vehicles made in the U.S. and other issues that further inspection shows to be misguided.

Another common wisdom…

…the United Stares and other major manufacturing nations simply cannot compete with the extremely low costs of “doing business” in China when it comes to manufacturing…

…times they are a changin’.

The Boston Consulting Group (BCG) in a recent study of global manufacturing noted that Chinese wage rates are rising at about 17 percent per year, while the Chinese currency, the yuan, continues to rise in value, significantly reducing that nation’s prior competitive advantage. At the same time, a powerful shift is under way within the U.S.

The BCG study noted that in 2000, China’s average wage rate, adjusted for productivity, was 36 percent of that in the U.S. By the end of 2010, that gap had shrunk to 48 percent, with a BCG estimate that it will be 69 percent in 2015. To note Hal Serkin of BCG, “The spread is getting down to a smaller and smaller number. Increasingly what you’re seeing (in corporate boardrooms) is a discussion not necessarily about closing production in China but about ‘Where will I locate my next plant?’”

Simply more competitive

More flexible U.S. work rules, lower labor and land costs, higher global fuel and transportation costs, and financial incentives from many local communities and states have made the U.S. much more competitive as a low-cost base for supplying the American market (the Agurban). Consulting firm AlixPartners reported that in 2005, Chinese-produced parts arrived at U.S. destinations an average of 22 percent cheaper than comparable products domestically. By the end of 2008, the average price gap had dropped to 5.5 percent (Jones Lang LaSalle). That differential has no doubt been eliminated since then. It brings into question the need to justify the risk and complexity of producing halfway around the world.

In addition, the issue of Chinese piracy of technology, theft of intellectual property and massive turnover of key personnel makes life difficult half a world away. Chinese authorities talk of the need to protect global patents and limit illegal and counterfeit products…

…good luck with that one.

A story in Time magazine notes that the average manufacturing wage in China is still only about $3.10 hourly, compared to $22.30 in the U.S. In the eastern part of China it is up to 50 percent more than that. For the vast majority of companies, whether small, medium-size or huge multinationals, the decision about where to produce a product is always driven by multiple factors, of which the cost of labor is but one. “For lots of companies over the past two decades, the disparity was such that labor costs often drove the decision,” notes economist Daniel Rosen, the China director and principal of the Rhodium Group, a New York City-based consulting firm. “Now, increasingly, that’s no longer the case.”

In the neighborhood

As one might expect, China has many competitors when it comes to the low-wage game. Such nations as Vietnam, India, Laos and Cambodia are attracting some of the cheapest labor manufacturing operations.

At the same time, China will remain a dominant player. The enormous size of its population, its rising consumer affluence and spending power and its stature as an enormous market of opportunity for companies to sell products from A to Z won’t change.

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