Advanced countries are concerned about maintaining their standard of living as developing economies progress. There are many determinants of standard of living but it seems to me that “being more desirable” than others is key. In that case, your products and services will be preferred over others’ and your value increases relative to others’. How does this tie to operations, the subject of this blog and my professional interest? Well, you are more desirable if you are more efficient (doing the same as others but at lower cost) or you provide something better (provide more quality, innovation, flexibility, or speed at the same cost than others). Indeed, those are the two fundamental strategies to gain competitive advantage and are clearly associated with your operational competencies.
Offshoring has often been driven by efficiency concerns but may come at a cost of “providing something better.” Indeed, supplying the US from China typically takes longer, incurs more transportation and overhead costs, and may be at risk of quality and IP risk. In addition, just like heat moves from high to low temperature and thereby reducing the temperature difference, trade-inbalance also serves as a dynamic adjustment process (for example of wage differences). A recent study by the Boston Consulting Group (BCG) provides interesting data on how this trade-off is changing:
Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world, according to a new analysis by The Boston Consulting Group (BCG).
With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.
“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”
In addition, one should make location decisions based on total landed cost (see our paper).
“And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said. “
The study cites several companies that are already rethinking their production locations and supply chains for goods destined to be sold in the US. Interestingly, the authors argue that a similar process is less likely to happen for Europe which will depend more on the Far East because of the European inflexible labor laws. This seems like a sensible prediction of the near future (next five years) and it is in line with our advice to design tailored operations strategies. But as with any forecast, its precision reduces the farther out we forecast and time will tell what the global situation will be in 2020 and beyond.