Low wage rates, particularly in such highly publicized places as China and India, continue to drive decisions about where U.S.-based manufacturers locate their production facilities. Indeed, lower wage rates in China make that Asian nation more attractive to U.S. manufacturers than Mexico and other Latin American countries, where better-developed logistics and infrastructure seemingly would provide a competitive edge, reveals a recent Lehigh University study on global sourcing. By one estimate, even after doubling between 2002 and 2005, the average manufacturing wage in China was only 60 U.S. cents an hour, compared with $2.46 an hour in Mexico. Ask companies what's the greatest pressure they're under and they "always tell us" cost reduction, states Robert Trent, an associate professor of management at Lehigh.
Yet, U.S. manufacturers -- large, small and in-between -- that let labor costs alone drive their production location decisions could be headed down the wrong road, perhaps even toward a dead end. "Just chasing low-cost labor is not Nirvana," stresses Anand Sharma, CEO and co-founder of TBM Consulting in Durham, N.C.
The theory of comparative advantage, one of the classic principles of economics, suggests somewhere there'll always be a low-cost location for manufacturing. If it's not China or India, it could be Thailand, Vietnam or Bangladesh. Eventually, it could be somewhere in Africa, ventures one analyst. Actually, it's already Vietnam, where Intel Corp. is building a $300 million semiconductor assembly and test facility in Ho Chi Minh City, notes Lehigh's Trent.
"Nike originally offshored manufacture of athletic shoes to Japan," says Ig Horstmann, a professor of business economics at the University of Toronto's Rotman School of Management. "When labor costs rose there, it moved to [South] Korea and Taiwan. When labor costs rose in Korea and Taiwan, Nike moved to China," he observes. "Being flexible and prepared to move to other regions and countries is part of the strategy for successful offshoring in industries that are largely cost driven."
More Than Costs
Nevertheless, at least in India and China, the situation is quite a bit more complicated.
For example, "it would not be easy" to shift computer software programming from India, which has relatively low labor costs and high-quality software engineers, to a country that had only lower labor costs, contends Hongxin John Zhao, an assistant professor of international business at St. Louis University's Cook School of Business. Successful overseas outsourcing depends not only on labor cost, but on labor quality as well, he says.
Although China and India remain among the world's low-cost production locations, a labor shortage exists in China and wage rates are rising there and in India. What's more, the cost of technical and professional people to support low-cost manufacturing is rising "at least three to five times per year" faster than the rate for production workers, figures TBM's Sharma. Paying between 80% and 100% of the U.S. cost for "qualified, experienced technical and professional people" in China is not unusual, he claims.
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