Article Abstract:
We’re Moving Overseas! Are We Making a Mistake
Blackerby Associates
By Phillip Blackerby, M.P.Aff
Low labor rates in China and other countries are attracting U.S. companies and considering moving their manufacturing overseas. Some wish to raise their own return on investments by lowering manufacturing costs. Others feel as though moving to China is necessary to remain competitive against other U.S. companies who moved operations there, or to meet client expectations of lower prices. Phillip Blackerby asks, are these companies about to make a huge mistake? He addresses this question through a series of pros and cons of offshoring.
Blackerby finds that the mistake is not necessarily moving manufacturing overseas to take advantage in low wage labor countries such as China, Hong Kong, Taiwan, South Korea, Indonesia, and India. He notes, “the mistake is in manufacturing products in one country for distribution in a different market.”
In this article, Blackerby discusses the traditional labor + transportation + duty equation to determine costs of production. In offshoring, however, there are additional, hidden costs that are not addressed in this formula. “Thus, labor savings on their face can save a manufacturer 24-26% of total production cost in China. The manufacturer still has to get the product to market, reliably over the entire product life cycle.” These costs are hard to see and measure, but they are very real and hurt a company’s ability to meet changes in the marketplace or out-maneuver the competition.
The real costs that Blackerby considers includes:
- Transportation & Customs
- Political Risk
- Currency Risk
- Control Risk
- Piracy Risk
- Inventory Risk
- Obsolescence
Many of these costs are often hidden, such as costs of inventory that are often classified as overhead (i.e. Rent, Security, Interests), while others are calculated risks, such as political unrest and product piracy, that manufacturers hope not to experience. However, in 1999 an estimated 120,000 disputes occurred in China, including demonstrations, strikes and violent confrontations with police. And the U.S. Customs & Border Protection agency names China as the top source for intellectual property rights seizures in 2002, representing nearly half of all IPR seizures.
Like Save Your Factory, Phillip Blackerby discovers the best solution is a simple rule that manufacturing is best done nearest to the final market. A manufacturer should build factories overseas if they wish to sell their product in those emerging markets. For products destined for sale in North America, they are more inexpensively produced in North America. The clear alterative to competing with low-cost foreign labor is by increasing productivity through robotic automation and implementing lean manufacturing techniques. By investing in North America manufacturing, companies can overcome the apparent short-term cost advantages of offshoring. Click here to read the article.
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