As for competition from other
low-cost Asian contenders, Steve
Ganster, senior vice president, Asia,
for Tompkins Associates, a Raleigh,
N.C., firm that advises mostly U.S.-based Fortune 500 and mid-size
companies, has analyzed the costs of
sourcing in nearby Vietnam and
found that with the exception of
savings in the value-added tax
regimes, there is no appreciable
benefit. India, he says, is hampered
by an inferior infrastructure and a
multilayered bureaucracy that
makes it virtually impossible to
develop and implement projects in
a timely fashion.
“China is unparalleled in its economic scale and size for both
exports and domestic demand,” says
Ganster. “None of the countries
we’ve looked at will be able to
match China’s will and ability” to
continue to make offshoring an
attractive sourcing option.
Ganster advises companies now
in China but mulling a shift in their
sourcing plans to first examine ways
to optimize their existing distribution networks. He says that might
include more effective consolidation practices at origin or streamlined transportation strategies such
as shipping direct to customers and
bypassing warehouses and distribution centers in the United States.
The risks remain
At the same time, however, the factors that led businesses to question
their China sourcing strategies are
still very much in play. Chinese
wages are on an inexorable upward
march. From 2002 to 2006, “total
manufacturing wages” in China
rose by nearly 70 percent, according
to consultancy IHS Global Insight.
A September study by McKinsey &
Co. found that Mexican workers
today make only 1. 15 times that of
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their Chinese counterparts; in 2003,
Mexican wages were double that of
Chinese workers.
And while a barrel of oil in early
December traded in the low $50 range, the
consensus is that it’s just a matter of time
before oil prices return to or near historical
highs. In the early fall, when oil prices were
hovering around $100 a barrel, the fuel
costs embedded in shipping an ocean container equaled an 11-percent tariff on U.S.
imports; in 2000, when oil prices were
around $20 a barrel, the figure was close to
3 percent.
Fuel and labor expenses can make or
break an intercontinental sourcing strategy, according to McKinsey. The firm compared the costs of building a mid-priced
computer server in the United States,
Mexico, and China and distributing it in
the U.S. market. McKinsey found it has
become more profitable to make the server
in Mexico than in China because of
China’s rising freight and labor costs.
What’s more, after factoring in all the elements that make up a product’s “landed
cost,” the server manufacturer would actually spend $16 more per unit making and
shipping the product from China than
building it in the United States.
In a global survey of nearly 350 senior
executives conducted by the Economist
Intelligence Unit and sponsored by UPS,
nearly half of all respondents said low-cost
sourcing had created significant problems,
especially in the areas of product quality
and delivery reliability. Although most
companies surveyed plan to increase their
low-cost sourcing, 10 percent intend to
reduce it.
Findings like that are welcome news to
countries like Mexico, which had hoped for
a southward migration of U.S. businesses
following the North American Free Trade
Agreement only to watch many of them
head instead to China. This time around,
it’s a safe bet that Mexico will aggressively
tout its value as a sourcing alternative to
China. “The Mexicans missed their first
chance with NAFTA. They aren’t going to
miss it again,” an executive of a major U.S.
transportation company said at the recent
National Industrial Transportation League
meeting in Florida. The executive asked not
to be identified.
