Will You Know When to Leave China?
November 1 2013 by Rosemary Coates
Considered the “workshop of the world,” China is losing some of its cache’ as an unstoppable manufacturing powerhouse. Rising labor and energy costs are forcing manufacturers just like you to reconsider locating operations to even lower cost labor countries such as Vietnam and Indonesia. For some companies such as Apple and GE, some production is moving back to its roots: the United States. But how do you know when it is time to bring some of your manufacturing back and what products should you manufacture in America?
There are many things that companies must consider when determining the costs and feasibility of reshoring. This is not a roll-back to the 1960s when manufacturing was King in the US. It is about moving forward to rebalance your global supply chains.
Take Apple for example; while they have returned some assembly of products to Silicon Valley, they have done so through their contract manufacturer, Foxconn. They have not reopened their 1970s production sites in Cupertino, CA. But the preponderance of Apple’s manufacturing remains in China, the largest future target market for Apple’s products. It is also where Apple’s supply base is located.
GE, on the other hand, innovated and automated the production of tankless water heaters. GE was able to reopen a manufacturing site in Kentucky where this new product is made for sale in the US market. But it wasn’t easy. Manufacturing these tankless heaters required extensive product innovation and factory automation.
To get ready to reshore your products, you must consider many aspects of the decision. Here are seven important parts of your Supply Chain rebalancing analysis:
- Costs – based on a total-cost-of-ownership model, can you get your US manufacturing costs to within 10-15% of Chinese production costs? This is the decision point most companies are aiming for.
- What features, functions and improvements are your customers asking for? What product innovation must be pursued to build new and improved products and attract consumers in the US?
- Can production be automated to extract labor costs and at the same time, achieve quality targets?
- Can the product be localized for different global markets? What product features need to be changed to optimize sales in the US or sales in China? Is China your most significant target market? If so, you should keep on manufacturing there for the local market.
- Where is your supply base located? If you move manufacturing back to the US or to another country, will you have to reestablish your supply base? This is not a trivial task.
- What skills are needed to restart manufacturing in the US? Are these skills still available in the local markets or will you have to train people? Can you rely on local community colleges, trade schools and universities for the skills needed to feed manufacturing growth in America?
- What local, state and federal incentives are available? Most communities are now offering tax breaks, free use of land or buildings and sometimes cash incentives to locate manufacturing in their area. Jobs growth is top priority for politicians and government officials.
Should you completely leave China or other low-cost countries such as Indonesia, Vietnam or Mexico? Don’t think this is the way to go. Instead, rebalance your manufacturing, bringing some back to the US where and when it can be justified.