The general impression across the Western world was that manufacturing moved en masse to China because labor costs are so much lower. That fallacy should have been discredited by now.
Yet, news reports regularly explore the issue and offer suggestions from experts on how countries can leverage their expertise to neutralize China's supposed cost advantages. In fact, an entire industry of research, procurement, manufacturing, and logistics expertise has developed over the last 10 to 15 years to support companies either relocating facilities overseas or seeking ways to blunt the edge rivals have supposedly gained from moving to China.
Join the Move-to-China bunch if you believe that country has gained its manufacturing edge simply by offering the cheapest labor costs on this planet. I assure you, however, that -- like many other industry executives -- you'll soon figure out labor represents only one of several reasons behind China's great pull and attractiveness to Western executives. In fact, research firms like IHS have long questioned the validity of the labor cost argument, noting that wages account for only a fraction of electronics production costs.
In its "teardown" analysis of the iPhone 4S from Apple Inc. (Nasdaq: AAPL), for instance, research firm iSuppli Corp. estimated the manufacturing cost at approximately $8 for the device, regardless of the model. This means manufacturing represents only approximately 4.1 percent of the total bill-of-materials and production cost for the 16GB iPhone 4S model and 3.7 percent and 3.2 percent, respectively, for the 32GB and 64GB models. Had Apple manufactured the iPhone in the United States or in Western Europe -- adding a multiple of two or three to its labor cost -- the total production cost would have edged up but not significantly, and the product, which retails for $500 and above, would still be highly profitable. You don't move across the world for that kind of leverage. What else is at play here?
Before attempting to answer that question, let's look at our next fascination in the China demonization campaign. After wearing out the low-labor cost pendant and after being repeatedly told by Western OEM executives that "labor accounts for only a small percentage of total cost," politicians in the US and Europe have been consumed by another obsession: alleged Chinese currency manipulation. China's hefty trade surplus with the US, according to Congressional leaders, is because Chinese leaders have refused to allow the Yuan to float freely on the international market, thereby grossly undervaluing the currency against the dollar and the euro.
So, to rectify this situation and "provide for identification of misaligned currency, require action to correct the misalignment, and for other purposes," US senator Chuck Schumer has introduced a bill named the Currency Exchange Rate Oversight Reform Act of 2011. The bill sets out a bunch of objectives, but it aims specifically to identify "misaligned currencies" and impose punitive sanctions on countries that fail "to adopt appropriate policies, or take identifiable action, to eliminate the fundamental misalignment." This bill is aimed squarely at China's economic jugular.
However, will it correct the fundamental manufacturing misalignment we see in relations between Western countries and China? I doubt it. But that's a subject for another blog. China didn't steal Western manufacturing jobs because of its lower cost advantages alone, and the elimination of that edge -- if the West can pull this off -- will not dramatically alter the global manufacturing landscape in the West's favor.
What, then, are the more critical reasons behind the shift in manufacturing to China? Why will this situation persist for a while despite indications wages are surging in China? How should the West properly respond to the perceived disadvantages in manufacturing? I will explore answers to these questions in my next blog, which will focus on the fascinating subject of "supply and demand" -- you'll be amazed how bad that nomenclature is and why the thinking behind it is equally wrongheaded.
Things get made today in China because of a bunch of reasons, but cheap labor is not the most impressive factor because it can be and is being neutralized. For now, I suggest we look more closely at the outsourcing wave of the 1980s that drove increased manufacturing specialization, the forces of economic globalization that have pulled China and its southeast Asian neighbors into a tighter embrace with the West, and the mouthwatering prospects of selling products to and serving the world's most populous nation.