Tuesday, July 26, 2011

Manufacturing in USA

Manufacturing has to be done at the lowest possible cost, where ever that happens to be. Why? Because when a good, or service for that matter, is produced at a higher cost, it effectively reduces the buying power of the consumer and drags down the economy.

So does this imply that manufacturing must shift to China / India from developed countries? No. Not necessarily. The fact is that it is not cheaper to produce things in China or India. These are actually high cost economies but the problem is that the governments of these countries, especially China, have distorted reality by building in various subsidies and thus artificially lowering the cost of manufacturing in China. How else can the landed cost of a product from China be less than the cost of raw material in North America? Shipping costs have to be negative for this to happen!! Subsidies can be in the form of devalued currency, lax labour laws, lack of environment compliance, loans that need not be paid back to the banks, and direct subsidies for every dollar of exports. All these things are happening in China and could have 30% to 60% impact on the cost of the product. For example, it is estimated that the Chinese Yuan is undervalued by upto 40%. In other words, China is playing spoil sport and taking deliberate action to undermine the future of manufacturing in the rest of the world.

On a level playing field, there is little doubt that North America can compete with China / India. Labour costs are a very small fraction (3% to 8% of the manufacturing costs, so that is really not an issue. Other costs of manufacturing abroad far outweigh the potential savings in labour costs - shipping, quality, long distance management, infrastructure bottle necks, corruption, etc. Of course there will be somethings that will always be produced outside North America but that is okay.

I was in India a few months ago and I found that products in India were much more expensive than Canada / US - clothes, shoes, house hold goods, electronics, almost everything. Services were cheap but products were very expensive. So how is it that they are able to ship products to North America and sell at a price that is lower than they sell in India. Go figure.

In other words, manufacturing is feasible in North America. It does not have to based on some ideolgoy. Just plain economic sense will suffice to justify manufacturing in North America. We just need a level playing field.

Source: Dinesh Chaudhari