But I Thought Everyone Saved Money in China

Sept. 28, 2007
Saving on labor isn't always enough to move production to China.

With China almost single handedly responsible for driving down the price of manufactured goods around the globe, it often seems inevitable that any low-end manufacturing can be done cheaper in the middle kingdom. But despite its many market distortions, China still hasn't managed to rewrite some economic fundamentals.

For capital intensive products, the cost savings on labor -- China's enduring comparative advantage -- won't always be enough to compensate for the costs incurred moving goods across the Pacific, or the cost of monitoring your suppliers in the other side of the world.

Undeniably, labor and overhead is cheaper in China. The government still controls electricity and water prices, and keeps the price of land artificially low in some areas. But for products where labor and overhead represent a much smaller percentage of overall cost than materials -- which are subject to global vagaries -- the reduction in outlay is often not enough for a customer to move their supply base.

In our experience, after transportation costs a firm needs to be able to realize a minimum 10%-15% cost reduction before making the move.

In a recent example, we were working on a project to manufacture a lightweight automotive component for a U.S. client. The reduction in costs from producing in China was around 5%, which becomes significant over a few hundred thousand units, but the client found it hard to believe that was the extent of the savings.

Because the piece was stamped, and no hands were needed, the only savings came by way of reduction in overhead; a common problem for products that required highly automated processes.

Moreover, as a heavy item, the piece exceeded the weight allowance of a 20 foot container without filling the space available, and this inefficiency in transportation added to the per piece cost of the component. Were the item lighter, or could be shipped together with a lighter item, a lower per item cost of transportation would have been realized.

At the same time, we looked at one of their more difficult pieces, also a fastener, that required not only multiple pieces to be stamped, but also these pieces to be put together. With greater labor content, the client was able to realize a saving of more than 15% on a million pieces.

If working to reduce the costs of highly automated products, make sure and introduce high labor products at the same time so as to balance out the portfolio as a whole. The goal should not be to save on every single item, but to develop a system that provides savings overall... or employ a mixed solution that leverages U.S. and Chinese production to result in a best case scenario, but keep in mind the additional management of such a program will add costs back.

Richard Brubaker is the Managing Director of China Strategic Development Partners. He assists foreign companies develop and implement their China based market entry and sourcing strategies. He also the Editor of All Roads Lead to China, a medium for China based news analysis and strategy.www.chinasdp.com

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