from MSN Money.
U.S. labor looks cheaper
About a week or so ago, I had an opportunity to spend a few hours talking to the CEO of a small manufacturing company based in the southeastern United States. Just like many other businesses around the country, it has been hurt badly during recent years by outsourcing. They lost business, first to Mexico and most recently to China.
He gave me a concrete example of one large contract lost to China several years ago. They initially quoted this piece of business at $1.60 a pound, with a cost of goods of roughly $1.20. In contrast, their Chinese competitor quoted it at 60 cents a pound, and even with shipping to the final destination in the U.S., the final cost was only 90 cents.
So you get the picture. It was not even really a contest. The business was gone within months, case closed.
Fast-forward to today, and the picture is quite different: Chinese salaries have been increasing in healthy double digits for the past several years, currency has been steadily gaining on the dollar at the pace of 7%-10% a year, and -- here is where the high oil prices come in play -- transportation costs have simply spun out of control.
So let's get back to the same little company. An order that was once lost because of the almost 80% difference in costs has now seen that gap narrow dramatically because of the rising salaries and rising currency. When transportation costs are added back, this gap becomes virtually nonexistent. It is now only about 5%-10%.
This cost advantage is now is simply not sufficient to justify all the risks related to outsourcing to China. What's more, after you make adjustments for the increased inventory levels required to support multiweek shipping cycles and account for unpredictable shipping costs, the case for outsourcing becomes even murkier.
Confirms discussion I had with the foundry salesman.
You know I am a China bull, but I am not stupid - this country singlehandedly rebuilt Europe, and spends more on the military than all other countries combined. When people speak of China competing with the US in anything - save knocking heads of student protesters, I can only laugh.
Jeez, we devote more of our agriculture to feeding cats and dogs, than the GDP of about half the countries on the planet.
Just to make this completely clear to everyone out there:
If the US devoted just 6 percent of its economy to agriculture the resulting output would displace the total farm labor force of China, with enough left over to feed all of Mexico, and Canada.
Prices would plummet worldwide, close to a billion farmers would lose their livelihood, and hunger as we know it would disappear overnight.
Let's see China compete with that!
Labor costs are not what makes China competitive. The biggest competitive disadvantage the US has is massive government waste, underwritten by a 60 year old debt bubble, and easy credit.
There is no way a relatively primitive, economically backward, country like China could compete with the US on the basis of labor costs, when it requires less than 1 percent of the American workforce to produce all the food you consume - and still have massive amount left over for export, and a further unimaginably large portion simply to burn as fuel!
In short, China is competitive because most of the US workforce produces absolutely nothing, creates absolutely nothing, and merely exists to waste resources.
I don't mean this as a diatribe, however.
It is just something for you to contemplate tomorrow morning as you consume outrageous amounts of gas to commute to your "service" (i.e., completely unproductive) job to read and delete an inbox full of useless and unnecessary emails, and attend astoundingly fruitless and inconsequential meetings which last hours and cover activities which, if they disappeared from this Earth, would cause no one a moment of the slightest concern.
This is what keeps China competitive, and, each cut in the Fed rate, each new government program, each new business or personal loan extended, adds a new layer of putrefying waste to the cesspool we call an economy.
The only thing worst than having this entire house of card collapse in our laps, is not having it collapse - the another generation enters the workforce under the same circumstances we have worked for years.
Full lives poured into an empty economy, and topped off with $1100.00 a month, for 4-6 years before you meet your maker.
Jeez, how F*K*G lucky can you be!
I'm sure that 2 buck/day guy is well versed in CNC machining. <G>
Obviously products that have a high % of unskilled labor in the content will be less likely to come back.
The key is comparative advantage. Unless trade is corrupted by tariffs or other items that hide true costs such as dollar pegs, then the products will move where it is advantageous to produce it there.
Ask your VP what he thinks now with transport costs going up. Be interested in hearing the answer.
BSi, instead of expressing what sounds like "confusion", just watch the flow.
The quandry you are in will clear up in oh, 9-10 months or so.
You have been on the right side of the trade, just too early. You and may others have been ahead of the curve.
Bad times are ahead. World markets aren't reflecting it yet.
US companies are reflecting good sales (influenced by international).
Influenced by currency.
Influenced by "good" inflation (and you should understand that).
Either sit with the KING (cash), or trade long on Asia for a few months.
Then, hit it with what you have neen touting recently.
Sorry to sound like such a brazen, simple, bore.
I'm fine, thanks. The VIX/VXN are setting up. I'm just pointing out the tells to those are interested or may have missed them.
PS. Loading out scrap at 350/ton. 2 hour wait to unload at the dealer...draw your own conclusions.
That I don't disagree, the cost has been going up, and now they have a new labor law that will make them even less competitive, it will be harder for us to fire people and we now need to start buying insurance for the workers there.
However, that doesn't mean the manufacturing jobs are coming back to the US, our VP proposed that we should consider setting up shop in Vietnam, we went over last year to check things out, when we were there checking out one of the site, our guide points to one of the guy digging trenches and said, "you know how much this guy makes a day, 2 dollars." how can our workers here compete with that?
I would not count on that just yet, I don’t know how it is for small manufacturing companies, but for big manufacturing companies, I hate to say it, outsourcing is still the way to go, you need to worry about unions, their benefits, health insurance, retirement pension etc over here, you don’t have to worry about any of those in the developing countries, if you do, they would be still a lot cheaper than here. Their standard of living is simply a lot cheaper. The politicians keep telling us to keep the manufacturing jobs here in the US, but are they going to tell our competitors in Japan and Europe to do the same? There is just no other way around it, if our competitors can keep their costs lowers than us by going to China and India, we will be doomed if we don’t do the same. There has been talks about going to countries like Vietnam, but the problem is, they just don’t have the infrastructure just yet, and the country is so corrupted, you need to start hanging out money to the officials even before you leave the airports.
The pendulem swings back and forth. Been in situations where companies outbid the inhouse production of items. Then the outside mfgr could not meet production schedules, quality, etc. The purchasing dept looks like a hero till the sh-t hits the fan. Then they bring the production back inside. And it starts over.
With the cost of transportation, heavier inventories to compensate for delivery times, etc., it'll swing back toward domestic production.
Those jobs are not coming back anytime soon. If china becomes expensive for the manufacturing jobs, they will find a cheaper country. As flea said, its vietnam. If not, they will go to Africa.
The same thing is happening to IT/Call center jobs in India. The salaries have went up so much in recent years, now the Big IT US companies are looking at philippines or Eastern Europe.