Why Chinese manufacturing is on its way out

07/31/2015 - 06:05

Ally Mann | @AllyManneray

In the not so far away future, Chinese manufacturing costs will be equal to those in the United States. With the rising labor costs in China and the lowering production costs in the U.S. it is unlikely that we will continue to see “made in China” stamped on the bottom of all our goods.

Rising Labor Costs in China

Wages in China have been steadily increasing since 2003. In fact, the average annual wage increase has been 12% since 2003. That’s some major inflation. For every dollar required to manufacture in the U.S., it now costs $0.96 to manufacture in China. So for every dollar you are only saving $0.04 by manufacturing in China over the U.S., which is pretty dismal. Luckily that number does include shipping, but for only $0.04 is it really worth it?

Shipping Costs

Shipping to the U.S. from China takes 2 weeks to a month on average. Then add a 16+ days for shipping to and from inland factories. You can be over a month and a half out by the end of it all. Not to mention the actual costs of shipping across the Pacific, which remains relatively cheap but not cheap enough to make up for the large wage increases. Manufacturing in China used to be 25-20% cheaper than manufacturing in the U.S., that gap is closer to 8-10% now.

Lower Production Costs in The U.S.

The Yuan has appreciated a lot in the last few years. Although this is great for China, it also means that prices are rising in China. The cost of a thousand cubic feet of gas in China is about $15 whereas the U.S. is about $3.25. That is a huge expense when you look at how many cubic feet of gas go into manufacturing electronic goods. Companies like Apple, Whirlpool, and Airbus (jets for JetBlue) are moving some of their manufacturing back to the U.S. in wake of these increases.

New Manufacturing Powerhouses

New countries are coming to the forefront in the battle to become a low cost leader. Indonesia is now the lowest cost country for manufacturing, followed by India and then Mexico. Interestingly though, China is not suffering from the potential loss of their manufacturing business due to the ASEAN China Free Trade Agreement. China’s exports to all the other countries in the ASEAN region keep their market profitable. On the flip side, Mexico is very viable option for the United States to move to for manufacturing. In addition to their cheap manufacturing shipping costs would also be decreased based on Mexico’s proximity to the U.S.

Reliability in China

Most companies however, will keep their manufacturing in China. There is a security in China due to the reliability of services. Companies open themselves up to the unknown when they move their manufacturing to new countries. Accessibility to all the services needed in a company's supply chain can get questionable when moving manufacturing. There is also the potential for loss of productivity from the skills and learning gaps of workers that will take time to overcome. At this point many companies are staying in China until they can ensure that their supply chains and productivity costs will not be negatively affected.