Today’s MilAero Options: Outsourcing—‘Everybody’s Doing it’ Not so True Today

Estimated reading time: 2 minutes

History

There was a time, not so many decades ago, when that most commonly-stated mantra (“lower labor costs”) behind offshoring printed circuit fab (and some assembly) operations, still had some case-by-case validity. There were other drivers that could and did apply in some cases, including:

• Availability of the latest in production technology (backed by governmental investment, favorable tax status, long-term strategic investment strategy vs. short-term profits)^[1]
• Simple geography, both for those with major East Asia markets and where necessary intermediate manufacturing inputs (notably electronic components, modules, displays, etc.) are manufactured nearby^[2]
• Overt or hidden “China content” requirements imposed by state and quasi-state organizations (CATIC, etc.) as condition of sale of completed equipment into China
• Outsourcing “in crowd trend” (“..if company ‘X’, our major competitor or main customer is outsourcing to China, they must have research that justifies the move…”). The “Fad diet” justification.

The relative weights given those factors in the decision process varied wildly between organizations, and (naturally) affected the likelihood of success of the outsourcing venture^[3].

Even a well-reasoned and thoughtful “correct” (at the time) decision may need re-thinking if the underlying factors change, and, in regards many of the factors behind choices to outsource manufacturing operations to China, things have certainly changed.

Present Day

Considering ONLY the labor cost of production metric, the decisive advantage in labor cost contribution to the cost of goods produced that China enjoyed in the mid- to late-1990s has all but disappeared. Wages in the manufacturing sector in China, on average, increased eight-fold between 1995 and 2009. As recently as last year, the regional wage differences across China were still driving manufacturing operations there further inland to the Western provinces, but even that is starting to shift to even lower-cost labor pools elsewhere in SE Asia^[5]. U.S. productivity advantages have eroded in relative terms, but are still much higher than in China^[4], such that the manufacturing output per outlay (“effective labor cost”) is only slightly lower in China than in the U.S., by some calculations, around 4%^[6].

There are other factors at work here, as well. With the increased standard of living, expectations have changed, labor relocations from low-paying regions to high-paying regions have highlighted inequalities, and overcapacity, automation, and reduced global demand have raised the dual Chinese dragons of “layoffs” and “strikes” to alarming levels. Beijing’s responses have reflected uncertainty, unfamiliarity with the problem, and inconsistency. Some parallels between the current situation in China and the events leading to the surprising Polish Solidarity phenomenon have been mentioned^[7,8]. Automation improvements and technology shifts further reduce the importance of wages in determining production location^[9].

References

1. H.Nakahara (NT Information Ltd.) comments in Custer Consulting Group Daily News, 21 March 2016;  CNN, Manufacturing.net articles referencing Oxford Economic Reports, “China Labour Costs Only 4 Percent Below US.”

2. “Geography and offshoring to China,” Ma and Assche, Voxeu.org.

3. “Strategic Outsourcing: the Good, the Bad, and the Ugly,” Ligus, Rockford Consulting.

4. “Global Supply Chain Growth Set to Slow Amid Technology, Labor Changes,” Whelan, Wall Street Journal.

5.  “Made in China' labor is not actually that cheap,” Yan, Money.cnn.com.

6. “Report: China Labor Costs Only 4 Percent Below US,” Szal, Manufacturing.net.

7. “Striking Workers Bad For Business in Waning Chinese Industry,” Soergel, US News and World Report.

8. “China on Strike,” Griffiths, CNN.com.

9. “Global Supply Chain Growth Set to Slow Amid Technology, Labor Changes,” Whelan, Wall Street Journal.