BCG: Dissecting the Reasons Manufacturers (In Certain Industries) Are Bringing Spend Back Onshore
Categories: Spend Management |
We’ve always contended at Spend Matters and MetalMiner that any part or component that you could fit in a shoebox might be a good candidate for global sourcing, even global sourcing over the long haul. Yet dissecting the China sourcing equation requires looking at two key factors that contributed to the cost advantage of the Asian giant. First, the undervaluing of the RMB (as well as export VAT rebate schemes and production subsidies tossed in for good measure). And second, as BCG explores, the cost of labor in China. But here, as we all know, things are changing.
But for the industries that BCG outlines, labor matters more than you might think. Here, the authors suggest that these verticals “were among the early beneficiaries of China’s entry to the WTO. In the first three years after 2001, Chinese exports to the U.S. of products in these sectors surged by about 20 percent annually…although labor accounts for a relatively low share of total costs in these industries, the fast-narrowing differential between Chinese and U.S. wages makes this an important factor…Chinese wages are projected to continue rising by 15 to 20 percent per year in U.S. dollar terms, outpacing productivity growth in China. When U.S. worker productivity is factored in, the once-enormous gap in labor costs between China’s coastal export zones and select lower-cost U.S. states is projected to close to less than 40 percent by 2015. When shipping costs and other factors such as the hidden costs and headaches associated with extended global supply chains are accounted for, China’s cost advantage will be marginal.”
It’s economic analyses like this by BCG and others that suggest the writing is on the wall when it comes to Chinese exports. That is, unless of course, China finds some other currency, trade, tax or other lever to manipulate further.