- Despite rising costs, Chinese manufacturing remains extremely attractive for many products
- There is no massive rush to repatriate jobs to the U.S.
- Many OEMs are looking for alternatives to expensive coastal areas of China
- Increasingly attractive consumer markets are developing in Asia
- Much of the outsourced manufacturing to China is done without an analysis of total costs
Keith: 'The explosive growth of the emerging market consumer in Asia has more than made up for the slightly diminished attractiveness of China as a new or incremental outsourced manufacturing destination for western OEMs.'
China Offers More Than Cheap Labor
But wages are just one part of the manufacturing equation and in more and more cases, wage differentials and labor arbitrage is no longer an import factor. China has emerged as the world’s electronics factory over the past 15 to 20 years, and has positioned itself well to defend its dominance with far more than just cheap labor. Those of you that follow me on Twitter (thanks mom) will know that next year China will become the world’s largest user of industrial robots. The country has also developed an incredibly diverse and robust supply base for virtually all of the components and raw materials that go into today’s modern electronic products and an increasingly skilled and experienced technical workforce to support these activities. Today an individual company’s consideration of possibly re-shoring widget production back to the U.S. is complicated by the fact that most of the components for their widget are built in China.
I asked Mark Mondello, Jabil's long tenured COO, and recently appointed CEO, for his thoughts on rising costs in China and how they are influencing manufacturing strategy for his company and its clients. Mondello said “Clearly costs in China have risen over the last five years and we see that trend continuing, but for each and every product, each and every customer, and each and every end market served, there are a multitude of variables that need to be considered when deciding on global supply chain solutions. These are complex issues that we model every day and that impact customers very differently.” The number of interrelated variables impacting manufacturing location decisions does indeed make this a complex issue and one that is influenced by a number of different macro trends.
Perhaps the most influential counter-trend to a dramatic reshoring of production to the U.S. is the emergence of increasingly attractive consumer markets in Asia. It is very true that the size of the cost reductions to be realized by outsourcing production to China has slowly and steadily contracted over the past seven years; but during that same period the attractiveness of Chinese production to satisfy Chinese consumption has steadily and dramatically increased. Over the past five years or so, the U.S. consumer has become somewhat tapped out while the consumer in China has been doing some serious consuming. From 2007 to 2010, total U.S. household spending rose less than the rate of inflation (it contracted in real dollar terms), while household spending in Vietnam, Indonesia, and Malaysia all grew in the double-digits. During that same period, the world’s largest consumer base in China grew household spending by more than 25% (see bubble sizes in figure 2). To put this into a geo-economic perspective, in three years’ time, both Malaysia and China each expanded household consumption by an amount roughly equivalent to the entire household consumption of Austria.
