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China Isn’t Being Displaced

I find myself confused between what I read in the press and my personal experience. One example is the exodus of manufacturing from China to North America. While this widely espoused turn of events may play well to nationalism and hope for local job creation, I don't see it.

My clients are being well served by Chinese manufacturers with good delivery, quality, and costs. When I have seen movement out of China, it is mostly to emerging low-cost regions as China's labor costs are increasing. Anything that I see returning to North America seems to be driven by logistics costs, not other performance considerations. How do I rationalize this gap?

I have gained some new insights about perception and reality from Pankaj Ghemawat's 2012 Technology, Entertainment, and Design (TED) lecture titled “Actually, the world isn’t flat.” Dr. Ghemawat provides compelling evidence that our perceptions about the magnitude of situations are significantly overstated. Using examples of globalization, immigration, and trade, he illustrates 3x to 10x error in our perceptions compared to reality. He attributes this to a dearth of data, groupthink, and exaggerated conceptions by proponents.

If he is correct, then the exodus from China may not be as great as perceived, and those who have experienced difficulty with low-cost region sourcing are probably a minority.

My personal experience, from having lived and worked in China, is that of a very hard working and capable culture. While I accept that there are issues in the country on many fronts, the majority are trying to do the right things. Their factories, just like the factories here, need to be managed with a prudent “trust-but-verify” style. Repatriation of manufacturing from a competent, low-cost region has me questioning the abilities of the organizations on both sides of the ocean. Poor initial sourcing decisions anywhere have bad consequences.

Dr. Ghemawat's “dearth of data” comment resonates with me. I see too many companies making decisions without benchmark data. I also see too many companies not managing suppliers. They are timid and avoid fact-based, constructive disagreement that should be resolved to everyone's betterment.

If we are making decisions based on perceptions, we lose the opportunity to improve.

16 comments on “China Isn’t Being Displaced

  1. elctrnx_lyf
    February 6, 2013

    I do agree there is a lot of difference between the actual scenario and reality. As matter of fact there may not be many companies moving the manufacturing to onshore unless it really makes the final cost of the product less. But at the same time there are companies like Google who is bang about local manufacturing is trying to raise the value of the brand and consequently making people more optimistic about future and in turn increase sales.

  2. chipmonk
    February 6, 2013

    I think what Ghemawat was trying to say at TED in a very roundabout way is that a lot of lying is going on about outsourcing to China in order to throw off the critics and thwart any popular / political blowback on its proponents. Every dollar of trade deficit with China works out as a # 3 negative imppact on the US economy. This has been going on for nearly 18 yers now with an annual deficit of $ 350 billion.

    But so long as a limited few can reap the benefits of Outsourcing to China and use foreign tax shelters to hide it from the IRS they can keep buying any amount of Media and Academic hacks to create false impressions like massive “insourcing” back from China into the US.

  3. ITempire
    February 6, 2013

    It is a disappointing truth for US and Europe that despite freight costs of shipping goods from China is higher due to a large distance, the goods produced in China remain cheaper after shipping than the locally produced goods. I believe the labour and legal compliance costs have risen so high (though good for the society) that it will now be a major leap backwards if they are reduced to make the region competitive when it comes to manufacturing.

  4. ITempire
    February 6, 2013

    @ elctrnx_lyf

    Google has to no reason to be pessimistic or consider China as an option because it is not involved in manufacturing. Secondly, Google runs on highly skilled labour and that is available in good supply in US due to advancement of technology there and availability of high quality education which produces the human resource that it needs.

  5. ITempire
    February 6, 2013

    @ chipmonk

    I don't get your point. How does one gain benefit if they are running a campaign about rumours of manufacturing shifting back to China and in actual they are manufacturing there ? These are large corporations that we are talking about who are manufacturing their goods in China and it is very difficult for them to hide this fact or impossible. 

  6. chipmonk
    February 6, 2013

    I think you got it backwards. I was NOT implying about large US Corp.s still outsourcing their Mfg. to China but THEMSELVES claiming that they are now doing it back in the US. Insread what I was saying is that it is their Agents in the Media / Academia creating an impression that much of outsourced manufcaturing was being brought back – for every real case ( e,g. some Lock Co. in the Mid West ) there have been hundreds of articles ( with Smoke and Mirror ) to create a FOG. As far as consumer electronics is concerned most chips and PCBs designed in the US are still being made in the Far East, assembled and tested in China.    

  7. ITempire
    February 6, 2013

    @ chipmonk

    How long do you think it would take, if ever, to get manufacturing facilities back to the US or other native regions rather than doing that in China ?  

  8. Daniel
    February 6, 2013

    Ken, there is no doubt that china will be in mainstream for some more years. The only thing is its attractive factors are degrading/come downs day after day. I hope they will be in main stream for another 10 years, even without that also the main stream industries can easily sustain for catering the domestic or Asian needs.

  9. Daniel
    February 6, 2013

    Waqas, would you think it's possible to focus the entire manufacturing hub to US or any other native states. I don't think so because still Chinese market/industrial environments are cheaper when compare with those countries. The only thing is corporate profit margins are reduced, when compare with olden days.

  10. _hm
    February 7, 2013

    With less of union and lower hourly rates, manufacturing is coming back to USA. This has advantage of people getting much better quality products. If people starts looking for made in USA product for high quality white goods and other products, China may slowly starts getting displaced.

     

  11. chipmonk
    February 7, 2013

    For the last 20 years China has bought from the US only 20 % of what it exports to the US. It is not all their fault of course.

    The fault lies mostly with US traders and financiers who have spread self serving lies and bought politicians here to take advantage of the much cheaper and regimented labor in undemocratic China. They have danced with the devil and in the process corrupted / compromised democracy in the US itself. Instead of changing China and making it more democratic, as every bloviating US politician since Nixon has been claiming, contact and trade with the staunchly authoritarian Middle Kingdom has decimated the US workplace and bled our economy.

    Over the last 3 decades China has caught up with the US in most areas of technology thanks to massive technology transfer by US companies outsourcing manufaturing to China, giving away US developed high tech ( aerospace, networking & mobile infrastructre ) as a bribe demanded by China ( part of Chinese national policy to catch up with the US by hook or by crook ) before they would buy anything, organized IP theft under protection of Chinese Govt., but most seriously by training millions of once quite backward Chinese STEM graduate students in the best US universities ( this was started by the very pro-China Kissinger to put pressure on the USSR, but now has backfired on the US itself ! ). So just repatriating manufacturing to the US is not going to help, the whole pro – China policy instigated by Kissinger and his Wall St. cronies must first be reversed and Govt. / policy organizations / academia in the US cleansed of beneficiaries / Agents of China..

    Consumer expenditure constitutes 70 % of the US economy. Distribution channels for consumer products have become dominated by China loving giants who have turned into Trojan Horses in the US on behalf of China. In US national interest they must be made to change their ways by various positive or negative reinfrcements.

    Many consumer products are technically sophisticated and potentially dual use ( meaning provide a pathway to defense technologies ). Manufacturing of these products MUST be brought back to the US. But advanced robotics & tooling should be used to reduce cost and increase flexibility / product variety. To reduce dependence on China for scarce raw materials ( e,g. rare earth metals ) & semi finished components ( e,g. PCBs ) their manufacture too must be re-started in the US, if necessary with Public financing / incentives ( per the successful programs for GM, Chrysler ), To make it all work about a million personnel ( Operators, Technicians, Engineers, Managers, Policy Makers ) need to be given a crash course ( 6 mo.s ) in Advanced Manufacturing ( as practiced in the best Wafer Fabs in the world – all still in the US ).

    So to finally answer your question, the preparation might take 1.5 to 2 years but stable, profitable manufacturing of target components & products can start at high volumes within 3 years. I say this based on programs I have managed.

  12. FLYINGSCOT
    February 11, 2013

    There is nothing wrong with building stuff in China or anywhere else for that matter.  However there is something wrong with buildling next to nothing in a major industrialized country in favor of offshoring to the cheapest provider of the day.  A healthy society is one that designs, manufactures and services goods.  Too much one way or the other is a bad thing.  Balance is the key.

  13. ITempire
    February 12, 2013

    @ Jacob

    Waqas, would you think it's possible to focus the entire manufacturing hub to US or any other native states.

    In my opinion, it is neither possible nor recommended for a company selling products all over the world. Diversification is good so that if one unit closes down or faces problem, the other remains operational.

    One scenario which I see is that if unemployment levels rise in the US and the labour and resources costs fall, then a company may think of migrating back. 

  14. Daniel
    February 17, 2013

    “Diversification is good so that if one unit closes down or faces problem, the other remains operational.”

    Waqas, that's an important point. Multinational corporate world has done diversification for easiness of transportation, business, tax advantages and for cheaper manpower for increasing their profits. For them margin/profit is important than the welfare of US citizens.

  15. ITempire
    February 18, 2013

    @ Jacob

    That is a good point. Reminding me of tax issues, in most countries it is beneficial from taxation aspect to set facilities in the localities to avoid major taxation hit on the financials. Every country discourages imports and encourages local production and export and the indicators to that strategy are imposing high tax rates on imported goods and providing subsidies and tax reliefs to local manufacturers.

  16. Daniel
    February 25, 2013

    Waqas, the main reason behind such tax sops are to promote internal/local market. This will help them for building a better living standards and hence money turnover. We can see the same strategy across all states/counties across the globe.

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