Posted By Jeff Moad, October 07, 2011 at 12:15 PM, in Category: Global Value Networks
There's been an assumption that, as wages and other manufacturing costs in China rise relative to the rest of the world, manufacturers there will attempt to retain their cost advantages by increasingly investing in automation to improve productivity. A report recently issued by the Boston Consulting Group, however, challenges that assumption. Automation-enabled productivity gains will not significantly shift the cost advantage back in China's favor, and it won't do much to offset the current trend that is seeing Chinese manufacturing costs rapidly reaching effective parity with costs in certain parts of the US, says the report's author Harold Sirkin.
Sirkin's argument is that increased automation investments by Chinese manufacturers would only serve to reduce the labor content in Chinese-made goods. And that would minimize the labor cost advantage that Chinese manufacturers continue to enjoy.
Greater automation investments, says Sirkin, "would undercut the chief competitive advantage of manufacturing in China--low labor costs. Automation reduces a product's labor content. Desspite the greater productivity that automation would afford, China's total cost advangate over the US would likely not increase significantly."
Sirkin provides the example of a kitchen appliance product for which labor accounts for 20 percent of the costs. In 2005, he says, the product's labor cost in a typical Chinese factory would have been 61% lower than in the US, and its total cost would have been 21% lower than the US excluding transportation and other supply chain costs. By 2015, Sirkin predicts, rising wages in China will have shrunk the total cost advantage of producing the kitchen appliance there to 13%. Installing automation systems identical to those in a US plant will improve China's cost advantage in 2015 to just 15%. Add in shipping, duties, inventory, and other costs, says Sirkin, and, "For such an appliance intended for sale in North America, many companies would probably decidde to build it domestically."
Rising labor costs, rising transportation costs, the rising value of the Chinese currency, and the rising cost of land in China over the next 4 years all will make outsourcing the production of many products to China uneconomical, particularly for companies selling to customers in the US, predicts Sirkin. Lower-cost countries in Asia and Southeast Asia don't have China's huge labor market or the infrastructure to take up the slack. And, while Sirkin predicts that Mexico will see a boom in outsourced manufacturing, he predicts a resurgence of companies returning production to the US, particularly to low-cost Southern states.
What do you think? Is Sirkin right that rising costs in China are rapidly making US manufacturing more viable? Is your company bringing some production back to the US? Is he right that increased automation in China won't shift the cost picture much one way or the other?
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