Thread: So much for the cheap China price, Mexico often beats China

http://www.businessweek.com/magazine/co ... ries_ssi_5

So Much for the Cheap 'China Price'
A new study says rising mainland wages and higher shipping costs, among other things, make Mexico a better choice for manufacturing

By Pete Engardio

June 15, 2009

As purchasing manager for the North American arm of Japanese auto supplier Takata, Fred Heegan used to feel pressure to shift manufacturing to China. But when a customer pointed to a lower-priced Chinese part, Heegan would talk about the added challenges of quality, logistics, and engineering changes. "There are significant hidden costs to having supply lines that extend to China," says Heegan, whose company manufactures auto parts in the U.S. and Mexico.

Heegan now looks like a visionary. A growing number of companies are moving beyond the usual considerations of labor and raw material costs in deciding where to produce goods to calculate the "total cost of ownership." That means tallying expenses associated with things such as storage and delays. By this light, the so-called China price, which always seemed to be at least 40% below U.S. costs on everything from bedroom furniture to telecom gear, isn't so low. In fact, China's once-formidable edge in manufacturing has all but disappeared in some industries, according to a new study by Southfield (Mich.) firm AlixPartners, which researches and consults on outsourcing.

AlixPartners studied five categories of machined products, ranging from large engine parts requiring significant labor to small plastic components that need little. The cost shift has been dramatic. In 2005, AlixPartners found that by the time the items had arrived at a U.S. port, Chinese-made parts were 22% cheaper on average than those produced in the U.S. By the end of 2008, however, the average price gap had dropped to 5.5%, which often isn't large enough to merit the hassle of manufacturing halfway around the world.

Even more surprising is the cost comparison with Mexico. While the total cost of making goods in China was about 5% cheaper than in Mexico three years ago, manufacturing in China now is about 20% more expensive. Compared with the U.S., the savings in Mexico have widened to 25%, from 16%. "A couple of years ago outsourcing to China was a no-brainer," says Stephen T. Maurer, AlixPartners' managing director. No longer, he says.

The biggest factors behind the sharp shift are currency fluctuations and labor costs. The yuan has appreciated by around 11% against the dollar since late 2005, and wages have risen 7% to 8% a year. To rein in polluting industries, furthermore, Beijing has stripped away tax breaks for exporters of some heavy industrial products.

That said, China's manufacturing advantages remain formidable. With factory wages averaging $1.26 an hour, the mainland is still hard to beat for labor-intensive products such as toys and apparel. China is also rising fast in industries like solar power modules and cars, thanks to strong domestic demand and generous government incentives.

Even with its eroding price advantages, China has retained its unrivaled supply base of parts and materials in some industries. It remains the king of consumer-electronics and PC manufacturing. "What makes this industry sticky is that the entire supply chain is now in Asia," says Michael Andrade, North America manager for Celestica (CLS), an electronics contract manufacturer based in Toronto. Transplanting that ecosystem to North America would take years.

And because of the recession, consultants say, most U.S. manufacturers are holding off on major moves right now. Whatever they can save by moving production may not be worth the cost and effort of relocating a modern, efficient plant with experienced managers and well-trained workers. Besides, says Maurer, "You don't want to shift everything to Mexico—and then see the yuan drop like a stone, making China cheap again."

Still, the reassessment of costs seems to have halted the herd mentality that drove many U.S. companies to China 5 to 10 years ago for what have turned out to be marginal gains. "A lot of work that went from Mexico to China probably shouldn't have," Maurer says. Production of high-end electronics, such as telecom switches and computer servers, is starting to return to the Americas so that supplies can be closer to U.S. customers, says Celestica's Andrade. Another variable is the cost of repairing and replacing defective equipment, which can be surprisingly high for complex electronic items.

The growing need for lean inventories also puts China at a disadvantage. Goods take 45 days on average to reach U.S. shores. With the recession making it more difficult to predict demand, manufacturers are being forced to stash unsold products in warehouses for longer periods. And the cost of meeting emergency supply needs is inevitably higher in China, from air cargo charges to premium trucking rates.

Such factors reinforce the belief of Takata's Heegan that it is better to buy parts closer to where final assembly happens. He cites the example of automotive wire harnesses, insulated bundles of electrical conductors that can cost $1 apiece and are churned out by the millions.

Heegan says he might be able to buy a harness from China for 15% less than in Mexico. But if a design is altered after a batch of Chinese-made harnesses is already on the boat from Shanghai, the company has to foot the bill for up to six weeks of shipping and handling of obsolete parts. And there are the complications of time zones, language barriers, and travel times. An English-speaking Mexican supplier can be at a U.S. plant within hours.

Cost is usually the major driver in a company's decision to purchase parts and products from abroad. Yet in a 2008 Pricewaterhouse-Coopers survey of retail and consumer-goods companies, one-quarter of respondents said they could not quantify actual savings

I think it is a great development that will improve the economy in Mexico but also encourage more Mexican workers to remain in Mexico and to leave here. Combine it with Heath Shulers SAVE Act and it helps us have a decent country again.

Of course this will not satisfy the Mexican bashing jingoists and the neo mercs.

I do my level best not to buy goods from either of these crap holes. Anyone notice that parts for goods from China now takes about two months, so that if your tv breaks and there is no part in stock in the U.S.A. you have to do without your appliance/tv etc., for weeks? Not to mention, buying from either of these so-called nations supports communism and the nation that is doing its level best to destroy ours. I demand American everywhere and most of the time, I can get it. If not, I'll buy second hand to keep more of MY hard-earned money from going to these nations.

See it did not take one long to find the thread.

I would be happy to buy products made in Mexico over ones made in China any day if presented the choice but its difficult to buy anything these days made any where except China.

Thanks my sentiments exactly, sometimes I would prefer American made goods but it is not an absolute.

Plus a Chinese friend tells me the exchange rate is getting worse, a dollar only buys 6 Yuan now, it used to buy 8 Yuan. Add this to their rising wages and higher shipping costs, and Chinese goods cost almost twice what they did a couple of years ago.