Articles Tagged ‘Offshore Manufacturing’

False Premise: Offshore Manufacturing Is Always Cheaper

Tuesday, November 20th, 2012

As someone who has been on the forefront of setting up manufacturing capability in foreign countries – a term we call “offshoring” – I have seen the attitude pendulum start to swing back to manufacturing goods and services right here in the United States. Creative minds that we are, we call this concept “onshoring.” Unfortunately, too many business leaders still believe it is prohibitively better to manufacture their goods in places like China, Thailand and Mexico.

I believe that it is better to manufacture here in America for many reasons; however, two very important ones prominently stand out. The first is the cost of labor. Thirty years ago, it was a no-brainer to search out cheap labor overseas. Technology was not as prevalent as it is now, and you needed “lots of hands” to put your goods together. However, the advent of technology has driven labor costs down precipitously as a percentage of the total costs of producing a product. Back in the early days when I set up plants in China, for example, labor costs approached an average of 20% of the total cost of the product manufactured (a broad brush estimate of all manufactured goods). Today, because of computerized systems and controls, analytical qualitative and quantitative analysis, robotics and many other technological marvels, that figure is closer to 8%. Therefore, even though an American worker extracts a working wage averaging four times his Chinese counterpart, the difference in labor cost as a percentage of the cost of producing the product is not as severe.

The second reason that I believe the barons of business should reconsider producing their wares offshore surrounds the concept of control. There are few of us who haven’t heard the horror stories of product counterfeiting in Asia, but it is a little known fact that the reverse engineering of manufactured goods is one of the fastest-growing industries in China. Talk about the innovative mind! Instead of warehouses full of white-coated engineers and inventors looking for the “next big thing,” there are those same warehouses and engineers (sans inventors) taking things apart and finding out how they tick, then manufacturing the “result” – under the real company’s name. Unfortunately, companies like Apple, Callaway Golf, Intel and countless others have nothing to do with these finished products, nor do they profit from their sale. And, most importantly, these intellectual property problems – and the implicit and explicit costs therein – are really the life’s blood of any company that markets and produces products.

To the contrary, these American companies spend millions of dollars on lawyers, legal exercises and in-house personnel dedicated to only these issues – money that the consumer ultimately pays for the real product that has nothing to do with its counterfeit cousin. We consumers are also paying for other control-related issues and problems companies face by manufacturing their products in places like China. Some of these control issues may be obvious, such as having to deal with the social, cultural and economic mores in these foreign lands. What is little-known, however, are the logistics and security costs for protecting your product in transit from manufacturing facility to store (or home). You think it’s as simple as a brown-shirted guy in a brown truck picking up your semiconductors in Shenzhen and putting them on the next plane out of Hong Kong? Not so fast, my friend! The paperwork, the coordination, the packaging (and, in many cases, the under-the-table graft and bribery) to get even the simplest of tasks done, that we in America take for granted, are not so well-known.

Due to the limits of time and space, I am not able to delve into detail for many other reasons that doing business in places like China is becoming too costly in terms of not only dollars, but the control of your product. But here is a listing of just a few of many:
1. The training of key workers, especially managers, in American manufacturing methods, terminology and overall communication techniques (e.g., native language, presentations, reporting, etc.)
2. Chinese business leaders are not as open-minded as their counterparts in the States. Ideas, suggestions and discussions very rarely occur with others not in their peer groups. Collaboration and cooperation are rarely utilized, especially within all the players within a particular supply chain (e.g., suppliers, distributors)
3. Business ethics are a relatively low priority in China.
4. Worker safety and worker respect and other compliance issues – again, a low priority.
5. Chinese manufacturing competition is so fierce, small “wars” have broken out over the stealing of each other’s workers, fighting the cost of improving the aforementioned quality and ethics issues, and resisting any scintilla of oversight the national and regional party apparatchiks dish out (hence, the graft).

And I haven’t scratched the surface of the added costs of customer service and satisfaction, aftermarket costs (warranties, spares, etc.), oversight, internal performance issues outside of manufacturing, quality, and so on.

Let me wrap this up by saying that the prevailing opinion and belief that we can make things more cheaply and quickly overseas is severely flawed. One may actually produce a cheaper product in a country like China, but once that product is packaged and on it’s way to its final destination, that is when the product’s “relative” cost starts to rise. And it has the propensity to rise even further when control issues preclude the parent company from having the relative control of the product’s intangibles post-manufacturing. While it may sound altruistic (not to mention jingoistic) to call for the renewed rebirth of manufacturing in the United States, the facts regarding the benefits of doing so far outweigh those of maintaining the status quo.

John L. Ware

John has accumulated over 35 years of experience and expertise within all types of business operations management – including manufacturing, supply chain, distribution, engineering and quality/compliance operations. Companies he has worked for include U.S. Surgical Corporation, Sun Microsystems, nVidia Corporation and Domino Lasers, Inc.

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