I read an interesting article that was sent to me by Rob Woods, our Director of Merchandising. The article is titled “An inside look at Logistics from Asia.” Full text of the article is HERE.   In it, the author who has lived in China for over a year suggests that America will never get any of the manufacturing jobs back from Asia because the labor is too cheap in China. He goes on to suggest that once China figures out how to open up West China, where there is an abundance of even cheaper labour, they will be more competitive than they are today.  

Our company has offices in China and has been purchasing from and selling to China for years. We have great knowledge of what works and why it works in China. It can be a great place to do business but it is also full of risks. It is with this understanding that I think the author misses a couple of points with respect to his contention that manufacturing will never come back to the United States.

Manufacture Plant in Asia

Top 3 reasons to believe that SOME manufacturing will come back to the US.

1. Currency – the Chinese yuan has been undervalued for years making its exports significantly cheaper against world markets. There has been a recent acceleration in appreciation making goods manufactured in China more expensive but the currency is still likely undervalued. Assuming the currency continues to rise, prices will only increase further. Read more at Forbes.com . 

The US dollars fall against a world currencies, at the same time makes US labour cheaper. A lower currency will make it more competetive to manufacture goods in the United States.

2. Tax Credits – The export tax credits applied to products exported from China gave an unfair trade advantage to many companies in China. Some companies were seeing up to an 11% rebate for exporting goods and therefore could sell at cost and still make 11% by way of the government.   Last year, under calls from other nations to scrap the subsidies, China reduced or eliminated the subsidies on 1/3 of products.  As the tax credits are removed, prices of the exports naturally move higher and make manufacturing elsewhere more attractive.  Click HERE for the full article in the International Herald Tribune.  (I personally believe that the tax credit creates one of the biggest challenges in buying from China…….the tax credit is given to the exporter. It creates a land of traders where most traders will say that they own the factory. For the unsophisticated buyer, this means that they are very frequently buying from a trading house rather than a manufacturer. This typically translates into a good first order as the trader tries to solidify the relationship and then poor orders as the trader substitutes different quality manufacturers to increase their margins.)

3. Freight – With the increasing cost of fuel, products where freight costs are a high percentage of overall price will be manufactured closer to their eventual market. For lightweight items such as Pez dispensers, an increase in freight would add a small increase to the overall price. For heavyweight items such as cement siding, an increase in freight can have a significant effect on the price.

In the end, the author suggests that “Manufacturing is going to chase least cost labor, and that if China gets too expensive, the work will migrate to India or Vietnam.” Our company buys from both Vietnam and India so In part, I agree with this contention. The point that I am trying to show with my less than exhaustive top 3 list is that while labor is an important component of manufacturing, it is only one component.

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3. Powerful Earthquake in China
4. What is the Long Tail?
5. Transparency: Products and Product Reviews