Why Manufacturing is Returning from China October 8, 2011Posted by tkcollier in Economy & Business, Geopolitics.
Tags: China, Manufacturing, Outsourcing
Shipping and logistics adds 17 percent; finding a viable Chinese vendor adds 1 percent; quality issues add 4 percent; travel and communications add 1 percent and “all others” add another 1 percent to the total price of a product manufactured offshore. Some products are simply not good to produce offshore — those made with highly automated precision processes; those that are bulky and heavy; products that require flexible scheduling; and products that undergo many revisions, causing an increase in quality failures.
In a case study comparing costs in the United States and China, Meeker and his MIT colleague Jay Mortenson found that it is cheaper by 8 percent to produce a current design in China. There are substantial savings associated with purchased parts from China that include direct labor (79 percent savings versus U.S. labor rates), indirect labor and salaries (61 percent savings), benefits (75 percent savings), overhead (40 percent savings) and selling, general and administrative (SG&A) (11 percent savings).
When adding logistics to the China price, the cost advantage of producing in China shrinks to 8 percent: $13.85 for a case-study product made in China versus $14.99 in the United States. But when design for manufacturing and assembly (DFMA) software is applied to the same product, the China advantage vanishes. The China cost declines to $9.79 versus the U.S.-made product at $9.47
Labor rates and benefit packages in China are increasing. Shipping rates, taxes, customs services and duties are increasing. The value of foreign currencies is appreciating, making overseas production less profitable. There are more regulations and bureaucracies engaged in foreign direct investment with new sets of rules. Companies are being required to share their most prized asset: their intellectual property. Most companies don’t know how to write contracts in Chinese, and those contracts are not upheld in Chinese courts. High worker turnover increases training costs and reduces quality, with some facilities experiencing between 40 percent and 60 percent yearly turnover in staff. Human rights and ethical lapses can ruin a company’s reputation.
“Costs are often missed because they are not allocated to product costs,” says Meeker. “Often costs are paid for by the corporation from various budgets,” he writes in his research paper. Inspection, supplier management and customs compliance, expedited shipments, onsite and remote supplier management, supplier development and problem resolution, higher utility costs, costs for skilled maintenance, steep learning curves and training, higher quality control systems and regulatory compliance are only some of the costs that are not tallied by companies. “Focusing on the cost reduction of individual parts may obscure the cost reductions from the entire product design,” according to Meeker. “Logistics and customs costs may eliminate the labor cost savings. Elimination of wasted material, requiring close control of the manufacturing process may prove elusive at offshore facilities.”
Added to these factors are numerous risks that are often ignored: complying with changing customs regulations, fines and penalties; geographic risks from natural disasters; logistical risks such as the availability of shipping and port capacity, clearing times and losses in transportation; poor infrastructure that leads to delays and quality issues; judicial, political and social instability; and the growing problem of contract manufacturers using the same equipment to make exact replicas for competitors.
In his presentations at industry conferences describing the high cost of moving to China, Meeker has had dozens of executives approach him afterwards saying ” ‘It’s not what it’s cracked up to be,’ ” he says. “When you look at all of the data and you put the bottom line to a project and look at the cost, it’s not as attractive as it was. It does not make sense to be over there. This is a classic story of nobody wants to admit their own mistakes in public. But the tide is turning. I have a giant pile of press clippings with lots of companies saying they are bringing their production back. They went overseas and got burned with lots of problems and now they want to understand how they can bring it back.”
Fortunately, there are design for manufacturing and assembly software systems that can give American manufacturers a cost advantage over Chinese production, he adds.