According to a BusinessWeek article, China has lost some of its competitive edge in manufacturing. When storage, transportation and supply disruption costs are factored in, there may be as little as a 5.5% cost difference between exporting machined goods from China and manufacturing them domestically in the U.S. The change is largely due to currency fluctuation and increased labor costs for manufacturing higher-tech items – the article points out that China still has a strong competitive advantage in toys and apparel.
More surprising, however, is that manufacturing auto parts and electrical switches in Mexico may now be 20% cheaper than in China. Even so, companies are unlikely to switch their entire supply chains over due to current investments and fears that the “yuan will drop like a stone,” making such a move both costly and futile.
But even aside from the obvious cost issues (and the article does not mention this), companies will eventually have to factor political stability more heavily in their sourcing decisions. There has been a considerable amount of grumbling over both Mexico’s violence and corruption and China’s “iffy” long-term economic prospects — the recent financial crisis has shown China the limitations of its resource-dependent, export-heavy model. China’s urban middle class comprises only a tiny minority of its population, and the bulk of the country’s people have yet to see much of the last 20 years of progress trickle down. It is not too much of a stretch to imagine that Beijing’s biggest fear – a government-toppling peasant revolt – could become a reality if millions of people are left without even $1.26/hour manufacturing jobs to sustain them. And if Mexico’s reputed lawlessness continues unchecked, companies will continue to shy away even if cost-related aspects are beneficial.
Interestingly, this article only explores Mexico as a potential sourcing option. India immediately comes to mind as a leader for U.S. manufacturing contracts, should the obvious choices become less and less attractive. In fact, India has already overtaken China in certain areas of skilled manufacturing.