China has become the world’s factory because of the availability of lots of labor at very low rates. Just about any product with a measurable amount of labor content can be acquired from a Chinese supplier more cheaply than from anywhere else or by making the item in-house. Therefore, U.S. companies routinely outsource a large percentage of production to China.
Outsourcing decisions are made, to a great extent, on financial grounds — comparing the total cost of acquisition from outside to the cost of producing the item in your own factory. That “outside” cost not only includes the actual unit price paid, but what is called “landed cost,” which includes transportation and handling, customs and duties, and any other expense that goes into getting the items to the receiving dock.
Many of these outsourcing decisions were made a decade ago and conditions have been changing — Chinese labor rates have been increasing at the rate of about 20 percent per year, fuel costs (and, thus, transportation costs) are up, currency exchange rates also fluctuate, etc. Recent studies indicate that the comparison of total cost for many types of products from China is about on a par with Mexico right now, and will likely be even with U.S. production in another year or two. In addition, companies are putting more emphasis on quality control (there have been some very public quality problems with Chinese-made goods in recent years), the extra inventory needed because of the long lead times for getting goods from halfway around the world, and consideration for supply chain risk (risk of disruption of supply).
As a result, a number of companies are now deciding to “re-shore” those parts and products; either by buying them from U.S. producers, or making them in their own factories. But it’s not that simple. When all that production demand left for China, the domestic factories closed, equipment was scrapped or sold off, and skilled workers either retired or found other ways to make a living. When a company wants to make or buy these products locally now, there is no capability to do it.
You have probably heard or read about U.S. manufacturing’s worker shortage. Companies want to re-establish the ability to produce these products that are currently made in China but can’t find trained machinists, tools and die makers, welders, etc., to do the work. At the same time, we are experiencing relatively high unemployment rates and a lot of college graduates are working in menial, minimum-wage jobs. There is an obvious disconnect between supply and demand in the employment market.
Part of the problem is that manufacturing has a poor image in the eyes of the younger generation. They don’t realize that today’s manufacturing jobs are more apt to involve programming and running computer controls than doing repetitive manual labor in a dirty, smelly factory. Automation is a big part of what’s bringing manufacturing back to the U.S. by reducing labor content and managing the automation that is at the heart of manufacturing jobs today.
Manufacturers need to reach out to high schools and elementary schools, Boy Scouts, Girl Scouts, and other youth organizations and show the young people what manufacturing jobs are like — get them excited about making things. Technical schools and community colleges must be seen as the gateways to good jobs and attractive alternatives to four-year colleges that don’t necessarily prepare a student for a job that’s in demand.
Reprinted from Portsmouth Herald / Seacoastonline.com – July 01, 2014