With recent calls for a return to "Made in America" and Chinese manufacturing slumping, will the U.S. realize the much talked about Manufacturing Renaissance? The short answer is NO. Not unless Americans are willing to pay $80 for an item tomorrow, that they can buy today for $19.99, or 3D printing truly reshapes manufacturing which we will explore in another post. In the short term, China's manufacturing sector is facing strong headwinds. With ever increasing labor costs (15-20 percent per year over the last several years), an appreciating RMB (despite a recent downturn), and increased government intervention; manufacturing in China is getting more expensive and more difficult. So if not the U.S., where does manufacturing go? At BRIC Language & Consulting we believe that good manufacturers in China will continue to thrive through innovation and automation while Mexico has the most to gain due to proximity to the U.S. market, a productive labor force, energy and NAFTA.
I am currently in China and have asked several manufacturers how their business was and what their outlook for the future is. Each of them replied that sales were down, within the group were both pessimists and optimists. The optimists were the forward thinking Laoban (Big Boss) that have been automating their factories to reduce a reliance on cheap labor. The pessimists were those that had continued with a business as usual attitude, hoping that while their factories deteriorated they could squeeze a few last Yuan from their facilities. The optimists are the people I agree with. I know from first hand experience that automation works, even for the simplest product. We had a factory that I was trying to convince to reduce waste, increase efficiency, and lower the reliance on cheap labor in order to build for the future. They did not. At the same time I had found a factory willing to work with me on automation. When we first started working together the automated factory was priced 3 percent high. I convinced our U.S. operations that we needed to continue down this path. By year three the new factory had the better price and was better run, by year five we were exiting the original factory. Business and manufacturing change, it is those who adapt to those changes that survive. Chinese manufacturing is here to stay it is just in transition.
I asked the pessimists what country, or countries, was China's biggest competition. The answer varied based on the product but stretched from the Philippines in the east to Myanmar, Indonesia, and Bangladesh and all the way to Sri Lanka in the west. I disagree, a few of these countries will become manufacturing hubs. However, all share the same long-term weaknesses as China for the U.S. market, minus China's high efficiency and strong supply chain. They face rising labor costs, inflation, and have to deal with long haul shipping to the U.S. In history it has always made more sense to manufacture close to your consumer base, the rise of China and East Asia has been an historic outlier and we believe historical norms will return.
Over the course of the last decade, while the U.S. has looked to China to produce inexpensive goods, Mexico has increased productivity and manufacturing expertise and is now challenging China. While both China and Mexico's labor costs are much lower than the U.S., Mexico's wages are about 40 percent higher than China's. However, China's labor costs are rapidly on the increase and Mexico's productivity per worker is higher. With rapidly increasing labor costs in China, an appreciating RMB, and relatively stable labor costs and currency it's becoming more attractive. Add to that its proximity to the U.S. and that makes final costs just about even. With better lead times, more manageable logistical costs, an advantage on energy costs, and the NAFTA agreement Mexico is in a good position to take advantage of the challenges facing China.
China is the reigning king in terms of manufacturing, but as costs rise, Mexico is primed to take some of that business. China's leaders are fighting to keep manufacturing in the Middle Kingdom, and are fully committed to it. In our next blog we'll look at the recent depreciation of the Yuan and other measures the Chinese leadership has taken to help boost manufacturing. The fact remains however, some manufacturing was always bound to leave China, and you can't fight history. China will remain a juggernaut but Mexico's advantages of a shorter supply chain for American customers, energy accessibility, and a high productivity level put it in a great position. Innovative Chinese manufacturers will remain competitive for years. But the Laoban who don't adapt will pass by the wayside and watch business move to Mexico. As for a return to U.S. manufacturing, that will have to wait until 3D printing has reached it's full potential, and even then manufacturer's will have to convince U.S. government regulators that it is worth bringing back.