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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global SupplyChain Logistics

From SCDigest's On-Target e-Magazine

Jan. 4, 2011

 

Global Supply Chain: Yet Another Report Sees China's Manufacturing Advantage Shrinking


Total Landed Costs for US Companies Lowest in Mexico, 2011 Manufacturing-Outsourcing Cost Index Finds

 

SCDigest Editorial Staff

 

In the latest in a string of analyses over the past 18 months finding the US is likely to regain manufacturing volumes as costs in China continue to rise (see New Study from Boston Consulting Finds China Manufacturing Cost Advantage Over US to Disappear by 2015), the latest Manufacturing-Outsourcing Cost Index from the consultants at AlixPartners finds similar trends, saying that China's current advantages are likely to eroded - but that what happens in the three critical cost drivers there are key.

SCDigest Says:

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if all three assumptions were to prove correct, US and China costs into the US would be roughly equal by 2015.

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The new report tracks average total landed costs into the US for a basket of parts and components across seven countries, including the US. The other countries are: China, India, Russia, Vietnam, Romania, and Mexico.

In the last year, Mexico has emerged as the country with the lowest total landed costs, coming in at about 75% of the US level. In last year's report, Mexico had been in a virtual dead heat with all the other countries except China for lowest cost source. However, all those other countries saw their relative costs rise about 10 percentage points over the past year (largely due to a falling dollar), while Mexico's relative costs rose only about 5%. (See graphic below).

China's relative costs rose sharply, to about 88% of US costs.

However, AlixPartners says that moving forward, it "expects LCCs’ competitiveness with the U.S. to erode," and that Asian low cost countries will likely be more impacted than Mexico.

All told, the current savings opportunities for low cost country sourcing are back to about where they were in 2005 and 2006 the report says, after some temporary changes in the figures related to the financial collapse and global recession.

China Faces Challenges

Alix says that since 2007, the competitive landscape for outsourcing has shifted significantly to favor Mexico, some locations in Europe, and several locations in Asia other than China.

 

Outsourcing Costs in Various LCCs Versus US Costs

 


(Global Supply Chain Article Continued Below)


CATEGORY SPONSOR: SOFTEON

 

 

The report says China faces cost pressures for outsourcers on three fronts:

• Wage rate increases


• Upward pressure on the Yuan currency


• Rising logistics costs versus say Mexico

Alix did an interesting analysis looking at expected changes in each of those three variables alone, and then all together, giving four total scenarios. Its projections for each variable through 2015 are:

30% annual increase in China’s wage rates. This is in line with Chinese wage inflation over the last several years.

5% annual increase in the strength of the Yuan. A widely accepted estimate of the under-valuation of the Yuan is 20% - 25% relative to the U.S. dollar.


5% annual increase in freight rates. This is a reasonable assumption based on increasing fuel prices and stabilization at pre-boom and bust levels.

It forecasts wage increases in the US at 2.5% annually over the same period.

Individually, if each of the cost assumptions held true, the China price would still be 5-10% below the US level, the analysis says. However, if all three assumptions were to prove correct, US and China costs into the US would be roughly equal by 2015 - about the same prediction Boston Consulting Group made in mid-2011. (See graphic below.) However, Mexico and India are likely to deliver goods at just 80% of US costs.

 

China Versus US Costs if All Three Alix Assumptions Prove Correct

 

 

Source: AlixPartners

The report states that China will certainly remain a powerful force in outsourced manufacturing due to its excellent infrastructure, capability to produce sophisticated products, and the costs of moving to another country.

However, Alix concludes that while "these hypothetical scenarios certainly don’t rule out China as an LCC contender, they do illustrate the challenges that companies can expect if they have concentrated the supply base for their U.S. operations in China. Again, while no one factor is likely to tip the cost advantage in the favor of the U.S. over China, a combination of reasonably likely factors could well erase some or all of China’s cost advantage over the next four to five years."

It adds these kinds of dynamics favor very flexible sourcing strategies that can be adjusted nimbly as conditions change.

Any reaction to the AlixPartners' analysis? What do you disagree with? Will production come back to the US - or simply go to Mexico or Vietnam instead of China? Let us know your thoughts at the Feedback section below.


Recent Feedback

I would include India in the scene.Though the entry barrier is relatively a major hurdle, it has a real potential for manufacturing to be outsourced, similar to IT at the moment. Among the positives, India has equally adequate infrastructure, professional engineers, quite open to the globalized world, and a stable government.


Himanshu Shee
Senior Lecturer
Victoria University, melbourne
Jan, 05 2012

With limited growth in Europe/U.S. over the next few years and internal growth in China, is there a possibility that Chinese manufacturers will compensate for losses as a low-cost country for Western consumption by pivoting to supplying its own needs and those of Asian/South America emerging economies?


Karen Owsowitz
Independent Consultant
Consultant
Jan, 05 2012

With the relative costs being (and becoming) closer between production in different geographies, maybe it is time to rethink outsourcing strategy. Given the need for flexibility and responding to changes (demand, bill of material, supply, etc.,) more weight needs to be placed on not just cost but also time to respond. Moving production closer to markets makes a lot of sense. This is especially true for the highly variable portion of demand.


Duncan Klett
Field Services
Kinaxis
Jan, 09 2012
 
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