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China_s_Eroding_Advantage - tide STRATEGY 8 CBMPETITIDN...

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Unformatted text preview: tide STRATEGY 8: CBMPETITIDN China’s Eroding Advantage Outsourcers are seeing the costs of manufacturing there climb, making other countries more attractive By Pete Engardlo ~ As purchasing manager for the North American arm of Iapanese auto supplier Takata, Fred Heegan used to feel pres~ sure to shift manufacturing to China. But when a customer pointed to a lowervpriced Chinese part, Heegan would talk about the added challenges of quaiity, iogistics, and engineering changes. “There are significant hid— den costs to having supply lines that extend to China," says Heegan, whose of machined products, ranging from large engine parts requiring significant labor to small plastic components that need iittte. The cost shift has been dramatic. In 2005, AiixPartners found that by the time the items had arrived at a US, port, Chinese‘made parts were 22% cheaper on average than these produced in the US. By the end of 2008, however, the average price gap had dropped to 5.5%, which often isn’t iarge enough to merit the hasste of manufacturing halfway around the company manufactures world. auto parts in the U .8. Even more surprising and Mexico. is the cost comparison i-Ieegan now looks like with Mexico. While the a visionary. A growing 9 totai cost of making number of companies a 01:“ mama”; goods in China was are moving beyond the {:0er ave emde a about 5% cheaper than usual considerations of bengfils (if Iimducmlg in Mexico three years labor and raw mate~ g? S m Elma“ Hete' ago, manufacturing rial costs in deciding :16 895: to pmduce in China now is about where to produce goods ummum auto part 20% more expensive. to calculate the “total , , Compared with the cost of ownership!’ That camp, 17 _ $25 U.S.. the savings in means tallying expenses ' Mexico have widened associated with things MEXICO $15 $2” to 25%, from 16%. "A such as storage and U5, $24 $29 coupte of years ago delays. By this tight, the ' outsourcing to China so-called China price, which always seemed to be at least 40% helowr U.S. costs on everything from bedroom furniture to telecom gear, isn't so low. in fact, China's oncenformidabie edge in manufacturing has alt but disappeared in some industries, according to a new study by Southfieid (Mich) firm AlixPartners, which researches and consults on outsourcing, AlixPartners studied five categories BUSINESSWEEK l JUNE 15.9009 Dale: Mummers was a no-brainer," says Stephen T. Maurer, AiixPartners' managing director. No longer, he says. The biggest factors behind the sharp shift are currency fluctuations and labor costs. The yuan has appreci— ated by around 11% against the dollar since iate 2005, and wages have risen 7% to 8% a year. To rein in polluting industries, furthermore, Beijing has stripped away tax breaks for exporters of some heavy industriai products. That said, China’s manufacturing advantages remain formidable. With factory wages averaging $1.26 an hour, the mainland is still hard to beat for iabor—intensive products such as toys and apparel. China is also rising fast in industries iike soiar power moduies and cars, thanks to strong domestic WHAT'S NEXT Chase report says Wei-Mart wants manufacturers to spend more on promotions and ads that appear on the retailer’s in—store TV network, "Failure to participate could have meaningful consequences ," the report concluded. Fan]. Boitman, head of the global Wa1~ Marl: team at Atlanta consumer-prod— ucts maker Nowell Rubbermaid, denies being asked to spend more, but another vendor concedes that it's happening. CMO Quinn insists that "any increase {in spending} is because there is value on both sides." EASIER TD COMPLAEN With fewer items to restock, employ- ees can, in theory, devote more time to helping customers. To drive home what Wail—Mart caiis its “fast, friendiy, cEean" message, store managers’ bo~ nuses are now based partly on scores of customer surveys. Until this year, only profits mattered. The manager’s office is being moved to the front of the store Erom the hack, making it easier for one w tomers to register a gripe. While Wat—Mart reports higher sales, faster inventory turnover, and happier shoppers in remodeled stores. retail experts are divided on whether it will retain higher— end shoppers. “If the recession ended tomorrow, they wouldlose a lot of thorn,” says Ryan Mathews of Black Monk Consult“ ing, which works with retaii clients. “But the longer the recession goes, the smarter Wall-Mart will be about hold~ ing on to those customers ." Newcomers such as Sarah E4 Bowman appear to be converts. The 39 ~year~old regal recruiter, who makes about $130,000 ayear and iives in Hagerstown, Md. , says she used to have “negative feeiings" about the world's biggest retailer. In January, to save money, she began grocery shop ping at a local outlet. She discovered a dress for her daughter, bathroom items, and even a tungsten wedding band, for $48, to repiace the one lost by her husband. “He gets compli- ments on it," she says, adding she’s “only totd a few people" where it's from. Asked where she’ll shop when the economy rebounds, Bowman re- plies: “I think I’m going to stick with Wat—Mart." :ew: Read, save, and add content on BW's new Web 2.0 topic network W Wat-«Marts Passage to india The wofld’s top—selling retailer reaiized a longtime goal with the opening of its first _ store in indie on May 30, reports The Trmes oflndialhe 50,0G{l~square«ioot outlet in the state of Punjab is one of at least $5 wholesale Stores Wal-Mari plane to open in the country over the nest three years in a joint venture with India's Shani Enterprises. l To read the story, go to hitp:/lbx.husineesweekcom/wal-mart/reference/ "WE Vi 'niost_fueljefflci_ent 'rnid ze sedan in th ompan ‘lnf‘sti history/Rpm quality ra'ti .toush- Bet-W To see why, please visit thefordstory.com. The detal1521£PAue5limaled 4r city/36 hwy mpg. Mldsize class p 34 cityl‘31 hwy mpg. FWD Actors? mileage wiil vary. Excluding vehicle program (www.mfercargov) Historic totals include ail manufacturers' entl oi service in asurveys conducted gioy - gins I _ e countryi We havethe most. - e "tSlJ'yi in the woricl? We-hav’ morefive—star test ratings” than'any age are unsurpassed byeither Toyota reconficlent about the road ahead; _ er R L Poik 8. Co. ZEared on unadjusted city fuel economy from EVA (mint?) and VGA (sloB) EPA-estimated 5 built For Mazda 35m ratings are part ofthe U S Department of Transportatlon's Safercar gov ties 4Based on cumulative survey data of '08 modei year competitive owners at 3 months 053 demand and generous government incentives" Even with its eroding price advan— tages, China has retained its unrivaled supply base of parts and materiais in some industries, It remains the king of consumer—electronics and 13C manufacturing, “What makes this in» dustr'y sticky is that the entire supply WHAT‘S NEXT chain is now in Asia," says Michael Andrade, North America rrlan— ager for Ceiestica, an electronics contract manufacturerhased in Toronto transplanting that ecosystem to North America would take years“ And hecause of the recession, consultants say, most U. S. manu— facturers are hotding off on maior moves right now Whatever they can save by moving produc~ tion may not be worth the cost and effort of relocating a modern, efficient plant with ex— perienced managers and well-trained workers. Besides. says Maurer, “You don't want to shift everything to Mexico—- and then see the yuan drop Eike a stone, making China cheap again.” Still, the reassess— ment of costs seems to have haited the herd mentality that drove many Ur 3‘ companies to China 5 to 10 years ago for what have turned out to be marginal gains “A lot of work that Went from Mexico to China probably shouldn't have ," Maurer says“ Production of highuend electronics, such as telecorn switches and computer servers, is starting to return to the Americas so that supplies can be closer to U.S.t customers, says Celestica’s Andrade. Another variable is the cost of repairing and replacing defective equipment, which can be surprisingly high for complex elec ~ ironic items. The growing need for lean inventories also puts China at a disadvantage Goods take 45 days on average to reach us shores With the recession making it more difficult to predict de - mend, manufacturers are heing forced to stash unsoid products in warehouses for longer periods, And the cost of meeting emergency supply needs is in- evitably higher in China, from air cargo charges to premium trucking retest Such factors reinforce the belief of Takata's Heegan that it is better to buy parts ctoser to where final assembiy happens. He cites the example of automotive wire harnesses, insulated burrdies of electrical conductors that can cost $1 apiece and are churned out by the millions Heegan says he might be able to buy a harness from China for 15% less than in Mexico. But if a design is altered after a batch of Chinese-made harnesses is already on the boat from Shanghai, the company has to foot the bill for up to six weeks of shipping and handling of obsolete parts. And there are the complications of time zones, language barriers, and travel times“ An English-speaking Mexican supplier can be at a U.S. plant within hours. IBWI Read, saver-and add content on BW’s ' newWeh 2.0 topic network ' Penny Wise, Pound Foolish Cost is usuatiy the major driver in a Company's decision to purchase ' parts and products from abroad _ _ . Yet in 512003 Bricewalerho'use- .1... . Coopers survey of retail and _ - ' consumer-goods companies, ' '- one-qoadar of respondents said ' _' _'lhey could not quantity actual ' ' savings. Many tracked transports" lion‘ customs, and warehousing _ costs. But qualiiyand reliability of _ _' ' vendors oftenwent unmeasored. . ' v To View the survey.- go to his buslnessweelccomfsupply-a ' chain—moneyementlreferencel WW JUNE" 15,9009 | BUSINESSWEEK @55 ...
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