Just in Time -- The Cost of Doing Low-Cost Business

Oct. 12, 2007
Everybody loves a bargain, but the Chinese seem to be reaping most of the rewards.

I've got a whole stack of books, research studies and analyst reports here on my desk, each one analyzing the emergence of China as an economic powerhouse, and purporting to explain why the Far East has become so popular for U.S. manufacturing companies seeking a competitive edge. I'm thinking the reason is pretty obvious: low costs. In effect, China functions as a kind of Super-Giant Wal-Mart for the entire world.

China has a well deserved reputation as being a supplier of cheap labor, but exactly how cheap is that labor? Outrageously cheap, actually. According to the 2007 IW/MPI China Manufacturing Study, a typical production worker in China earns 53 cents, compared to $15.00 for a typical production worker in the United States. Keep in mind, too, that production workers in China are considered part of the country's growing "middle class"; by far the majority of China's citizens -- nearly half a billion in number -- are agricultural workers earning the rough equivalent of a small bag of peanuts, without the shells. When they say labor is cheap over there, they're not kidding around.

That situation won't last forever, though. "It's absolutely not the Chinese game plan that they're going to work for peanuts wages forever for you and me," observes James Womack, chairman of the Lean Enterprise Institute. "If you're going to develop a country, you have to move from a lower- to a higher-wage situation. The central government absolutely wants to employ the best production methods and they want to be the best in their industry rather than just the cheapest."

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Ming Zeng and Peter J. Williamson, authors of Dragons at Your Door (Harvard Business School Press, 2007) agree that some wage inflation will occur in China, but point out that "productivity will simultaneously increase, especially as tomorrow's better-educated Chinese strive to get ahead in a fast-moving society." The authors also note that basic manufacturing wage rates are unlikely to grow very quickly due to the fact that no matter how many new production facilities open over the next decade or two, those companies will have a talent pool of hundreds of millions of rural agricultural workers to draw from. They predict that Chinese manufacturers will enjoy "a hefty cost advantage" for another 20 to 30 years.

The question on just about every U.S. manufacturer's -- or politician's -- mind, though, is: What effect will that long-term availability of cheap Chinese labor have on America's economy? The Wall Street Journal, which tends to take a very pro-China slant, opines that it's a "myth that China trade is bad for the U.S. Some workers have suffered from America's transition to an information age, high-value economy, but... many other Americans are benefiting from the opportunities China trade is creating." (WSJ, Apr. 28, 2007)

It's an open question as to whether the sufferers outnumber the benefiters in the United States. Certainly consumers have enjoyed low prices on toys, electronics, pharmaceuticals and numerous other commodities that have become staples of American life. Of course, as toys, electronics, pharmaceuticals and other goods are recalled in record amounts due to contamination and other product defects, many of those same consumers are starting to rethink their options. Inexpensive goods are always going to be popular, but cheaply-made goods? Not so much.

Clearly, though, with the recent example of Mattel's public apology to China still ringing in our ears, it'll be interesting to see whether the rush to move U.S. industries offshore will abate even a little bit. I suspect we'll only see a change in strategy if something spectacularly dramatic occurs, like for instance, if Wal-Mart shoppers decide to buy only toys stamped "Made in the U.S.A." this Christmas. However, given our insatiable desire to find the best bargains -- and that goes for motor vehicle parts, electronic components and cargo containers as much as it does for dolls and watches -- I don't see the Chinese losing too much sleep worrying about whether Americans will stop buying stuff made in China.

David Blanchard is IW's editor-in-chief. He is based in Cleveland. Also see Chain Reactions: David Blanchard's blog about supply chain management.

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