Over the last couple of decades, many U.S. companies have recognized the benefit of significantly lower labor costs by having production located in lower-wage countries such as China or India.
With the cost of labor in many emerging market countries increasing 15%+ per year over recent years and no end in sight to this trend, the labor cost advantage of being overseas is quickly deteriorating, and it may be time for U.S. CEOs to re-analyze the cost benefits of offshore production that is distantly located from the point of customer demand.
For an increasing number of companies (albeit still a small minority of the total number of companies that at one time moved production overseas), there has been a dramatic change to key cost assumptions, and the diminishing overseas labor cost advantage is no longer the key factor driving their location strategies.
One example is companies such as petrochemicals whose production costs are tightly linked to the cost of natural gas, which has dropped by nearly two-thirds in the U.S. since 2007. But more importantly to smaller companies, improvements in automation (both in cost and capability) may allow them to overcome the remaining wage cost gap using the current generation of robotics.
Even when there is no single compelling change to key cost assumptions, there may be a collection of variables whose sum will allow CEOs to conclude that the reduced labor gap no longer justifies having production remote from demand. These variables may likely include:
- Intellectual property protection concerns
- Lengthy and complex logistics pipelines, which increase working capital costs, limit the ability to make rapid product changes, and can carry high costs and risks related to quality problems
- The ongoing complexity of managing remote locations
- The need to re-source key components or raw materials locally or incur the cost to import into a remote location
- Initial incentives provided to locate in the offshore region may be expiring (or have expired)
- Increased shipping costs and duties to move offshore produced products back to the point of demand