I stress that cheap labor is not a significant factor in international trade, never has been, never will be, nor could be in theory or practice. I do understand that many believe it to be so. I do understand that in some places, wages are lower than USA. I do understand that USA businesses sometimes, but not very often, actually buy from factories where the wages are cheaper. A problem arises when people believe cheap labor is a significant factor, because they act on that belief. Take a look at where USA trades, and where it buys things? Notice anything interesting?
Like 1. Canada is USA’s #1 trading partner, not China. 2. China is our #1 source for imports, but then it is the largest country in the world. 3. Canada is a small country, but sells us 3/4s as much as China. 4. Mexico is a small country, yet big in exports, but it is in oil and heavy machinery. 5. Look who else we buy the most from: Japan, Germany, UK. All countries far smaller than China, but pound for pound, sell us far more. And of course, none have lower labor rates. And guess which country is the worlds largest exporter: USA. Is that because everyone comes here for USA cheap labor? Of course not. There is simply nothing in reality to support the contention that cheap labor matters, but it does matter if you believe it, and act on it.
Wired magazine inadvertently makes this case. Here is an article:
My comments are in between the *** *** .
To quote:
Every time the Krywkos visited Dongguan, their Chinese partners assured them everything was under control. Those promises almost always proved empty.
***How did this happen more than once? It tells us about the Kwyrkos, not the Chinese. And where are the quotes from the factory side of the story?***
When the Krywkos returned to the US, they searched for a manufacturing partner with the tools and expertise to produce their earphones. They found one just a few miles away from their Palmetto, Florida, headquarters: Dynamic Innovations, a maker of ruggedized computers and other equipment. Sleek Audio quickly signed up.
*** Of the some 354,000 entities importing into the USA, almost everyone produces domestically as well. Importing is not a business, it is a tactic, acted on once fully informed. Before importing, one checks for USA sources. Sleek audio obviously failed to check in USA first, the job of any start-up business.***
Today, a year since Krywko’s decision to go against the offshoring tide... Each earphone costs roughly 50 percent more to produce in Florida than in China. ... But Krywko is more than happy to pay the premium to know that botched orders and shipping delays won’t ruin his company.
***Error: One reason China is growing so fast is countless first rate business people deliver product to specification, on time, at a fair price. These people can be found, but never look on alibaba.com or any other “trade lead” sources.
VEry simple basic business steps:
research
worldwide RFB:
sampling...
costings....
references***
And so far, the gambit appears to be paying off: Based on enthusiastic customer response, Sleek Audio is now projecting 2011 to be its most profitable year ever.
***Here we go again, like Fellowes... announce you are leaving china, leave production capacity behind, and watch someone else come in and manage better than you.***
As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet.
***Prove it...***
“Companies are looking to base their decisions on more than just costs,” says Simon Ellis, head of supply-chain strategies practice at IDC
***Right, business 101, Product, place, price, promotion...business is more than just price, always has been . always will be, anyone who thinks just cost ends up like Sleek Audio, in trouble. Don’t blame the Chinese for that.***
When accounting giant KPMG International recently asked 196 senior executives to list their top concerns for 2011 and 2012, labor costs ranked below product quality and fluctuations in shipping rates and currency values.
***Correct, people in business don’t worry too much about labor rates, it is not a significant factor.***
And 19 percent of the companies that responded to an October survey by MFG.com, an online sourcing marketplace, said they had recently brought all or part of their manufacturing back to North America from overseas, up from 12 percent in the first quarter of 2010. This is one reason US factories managed to add 136,000 jobs last year—the first increase in manufacturing employment since 1997.
***19% of who? How is this meaningful? How much of that is necessitated by compliance with DOD contracts that war material be manufactured in USA? I doubt this return is sustainable without ever expanding war.***
The US certainly isn’t on the verge of recapturing its past industrial glory, nor can every business benefit by fleeing China. But those that actually build tangible goods should no longer assume that “Made in the USA” is an unaffordable luxury. Unless a company is hell-bent on selling the cheapest goods possible, manufacturing at home makes more sense than it has in a generation.
***This is unreflective. Almost everything sold in USA is made in USA, so the first point is goofy. All imports are only about 20% of our economy, which means 80% is made here. Walmart is doing extremely well being hell-bent on selling the cheapest goods possible. ***
China’s big manufacturing advantage has been cheap labor, but wages—while still low compared with those in the US—have risen sharply in recent years.
***Wrong. Less expensive management is the advantage China has. If Chinese labor rates have risen (which is true) then why is importing rising as well? For the same reason we bought more from japan as it experienced rising wages. They keep doing better work.***
Chinese factories deftly took advantage of this situation by making it easy for even the smallest US startups to find manufacturing partners. Factories polished their English-language outreach and established ties with professional middlemen. Soon anyone with a blueprint and modest capital could hire a Chinese factory to stamp out 20,000 units of a video tripod, an ergonomic joystick, or an espresso machine.
***And why do USA companies not make it easy for the smallest USA start-up to find manufacturing partners, etc? Why are we not deft? Is it bad that they are?***
But the system has started to overheat. Manufacturing wages more than doubled in China between 2002 and 2008, and the value of the nation’s currency has risen steadily.
***Like Japan before. Economics 201.***
It’s now under tremendous international pressure to let the yuan appreciate even more, and the country must cope with worrisome inflation at home (food prices rose by nearly 12 percent last year). And though Chinese workers still earn a fraction of what their American counterparts do, the rising costs of labor there are prompting companies to reevaluate their production strategies.
Once they do, these businesses often realize something profound: China isn’t the great deal they expected.
***China is under zero pressure due to Timmy’s huffing and puffing. Had any of these companies done a simple due diligence, they could have known before they spent 2 or 3 hundred dollars whether China was a viable source or not. Again, the vast majority of people trading with China are doing quite well. The story should be why these extreme few are doing poorly.***
A January 2010 survey by the consulting firm Grant Thornton found that 44 percent of responders felt they got no benefit from going overseas, while another 7 percent believed that offshoring had actually caused them harm.
***Again, meaningless without telling us who the sample is.***
One big reason for this growing dissatisfaction is quality. Like Sleek Audio, countless US firms have received long-awaited shipments only to discover that the products are too flawed to sell.
***No, this is easily countable. Duty drawback reports declaring destruction due to unsalability would give you a very close number. Quality control is a management issue. The vast majority of what China ships is to specification, on time. If someone gets less than ideal, that someone did not do his job.***
This problem is due largely to China’s success: Factories are so overbooked that they have no choice but to favor their biggest clients. The smaller customers can end up facing long delays or hastily assembled products (or both).
***No, the problem is due to a failure of USA managers. It is easy enough to find reliable factories. Simply check references.***
.
In addition to quality issues, subcontracting also exacerbates a second major problem with Chinese manufacturing: the lack of safeguards on intellectual property. The more subcontractors that get their hands on a design, the greater the odds of IP theft. Peerless Industries, an Illinois company that makes flatscreen and projector mounts, learned that lesson the hard way. “Knockoffs of our products started showing up in markets here in our own backyard,” says Michael Campagna, Peerless Industries’ chief operating officer. “It wasn’t necessarily our supplier doing it—it was our supplier’s supplier.”
***Here we go again, yet another company saying “we are failures in China... steal our supplier and markets. Fellowes, Sleek Audio and Peerless. The problem of knockoffs is so easily managed, as I lay out in my book. ***
In 2008, three McKinsey consultants analyzed the production of midrange servers, taking into account everything from shipping to quality to exchange rates. They concluded that fabricating such devices in China made sense in 2003, when the required labor was 60 percent cheaper there than in the US. At that time, they estimated, the per-unit savings ran about $64. But this advantage, McKinsey concluded, had vanished by 2008: “After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative—a burden of an extra $16.”
*** If true, midrange server manufacturers would have spotted it far before mckinsey. But observe, USA labor costs are still much higher, but yet cheaper to make in USA? Does this not yet again demonstrate labor rates are NOT a significant factor?***
This has become a common strategy among businesses that elect to manufacture in the US: Redesign with labor costs in mind. In essence, the companies are innovating around cheap labor. “We’ve redesigned products five or six times, trying to reduce the number of connectors, the number of screws, anything that would require additional labor,” says Albert VanLeeuwen, chief financial officer of QSI Corporation, a Salt Lake City manufacturer of rugged data terminals that has resisted the siren call of Asia. “With some of the products we’re introducing this year, we’ve decreased the labor content 40 percent.”
***Arrggghh... sounds great 40% savings. But when the component cost of labor is 5%, a forty per cent savings means cost of labor went from 5 to 3 %. Big deal. And robots do not get you cheaper labor, they get you no employee. Employees are management-intensive, and in USA to make a hire is to take on Uncle Sam as an adversarial business partner, in cahoots with the employee. USA business usually go overseas and buy where labor rates are the same mainly to avoid hiring USA workers. Fix that, and we’ll fix a lot of the USA unemployment problem. Even robots must be managed, and the Chinese will manage robots better than us, because part of USA management cost is to sit around whining about China, and begging Uncle Sam to bail you out when you fail.***
But what if that company wants to scale up and sell millions? Big customers get more than just the best price quotes and most prompt service from Asian factories; they also frequently receive massive government subsidies and perks. When a nation offers to pay hundreds of salaries and throw in free land to boot, an ambitious company can find it hard to say no.
***How is this different than in USA?***
But there is evidence that large corporations are no longer automatically swayed by these goodies. In October 2009, NCR decided to stop manufacturing its North American-market ATMs at facilities in China and India and make them instead in Columbus, Georgia. Last October, General Electric elected to invest $432 million in four new US manufacturing facilities that will build environmentally friendly refrigerators and water heaters. These are precisely the sort of companies that stand to benefit the most by heading overseas. But they determined that the smarter long-term play was to narrow the physical distance between R&D and production. “By colocating all the people who are involved in bringing a product to life, we increase collaboration and problem-solving and shorten development time,” says Kevin Nolan, GE Appliances’ vice president of technology.
***GE is one of the largest recipients of taxpayer bailouts, and war machine contractor. How is its experience relevant to anyone in a legitimate business?***
It’s also a safe bet that Asia will fight to win back those smaller companies. It will likely do this not by lowering prices but by ironing out the procedural kinks that have made offshoring an increasingly dicey proposition. Factories in the Chinese interior will try to prove their reliability, aided by government programs designed to improve the nation’s infrastructure. Quality-control regimes will be revamped to decrease the number of lemons that slip onto container ships.
Meanwhile, other countries will continue to offer an alternative to either staying in China or coming home. Vietnam, for example, is trying to position itself as a viable option for Western tech companies, a sales pitch strengthened by the fact that Intel recently opened a 500,000-square-foot factory in Ho Chi Minh City.
***In the meantime, USA invades countries that are no threat to us, countries that can overthrow their own dictators without our help anyway. Why don’t we make USA attractive for importers overseas to buy from us? For us to manufacture here? Quite the contrary, it is the stated policy of the US Government: get big or get out.***
Delays and quality control are management issues. it is management that matters, not cheap labor. And in some categories, to get good management, the price is the same as USA. You can know before you go.
2 comments:
***This is unreflective. Almost everything sold in USA is made in USA, so the first point is goofy. All imports are only about 20% of our economy, which means 80% is made here. Walmart is doing extremely well being hell-bent on selling the cheapest goods possible. ***
when was the last time you toured a wal mart or any auto parts store including napa, target, best buy, any retailer except grocery? i venture to say 80-90% of the goods in those stores are imported.
But you do understand, that if 80% of what is sold in USA is made in USA, then even if 100% of what is at walmart, best buy and napa is from overseas, it does not change the fact 80% of what is sold in USA is made in usa.
Next, yes, a lot of what is sold at walmart (I do not know what percent) and those other companies is from overseas, and none of them have quality control problems. Thus, both ways, the thesis of the Wired article is proven false.
What matters is management effectiveness, not labor rates.
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