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OM in the News: Manufacturing Jobs Begin the Long March Back (From China)

June 15, 2012

For more than a decade, deciding where to build a manufacturing plant to supply U.S. markets was simple: China was the  answer. But the International Business Times (June 2, 2012) estimates that in the next 10 years, increased production from manufacturing re-shored from China will add  $20-$55 billion annually to the U.S. economy. And in 5 years, U.S. exports could increase by  $65 billion annually, creating  1.8-2.8 million new manufacturing jobs here.  In the next few years, rising Chinese wages, higher U.S. productivity, a weak dollar, and other factors will virtually close the cost gap between the U.S. and China.

The article, a good starting point for the semester, looks at 4 issues:

Labor Costs. In 2000, factory wages in China averaged just 52 cents an hour,  3% of what average U.S. factory workers earned. Since then, Chinese wages have risen by double digits each year, while costs for U.S. production workers increased by less than 4% annually. Since wages account for 20- 30% of a product’s total cost, manufacturing in China will soon be only 10-15% cheaper than in the U.S. — before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single percentage digits or be erased entirely.

Logistics. Logistical issues — such as shipping costs, the time it takes get a manufactured product to the market, and the proximity of production lines to engineering and design teams — are big factors in comparing China vs. U.S. manufacturing.

Supply-Chain Threats. There are the many costs and headaches of relying on extended supply chains. These include inventory expenses, quality-control problems, and the threat of supply disruptions. For example, the floods in Thailand last year left Apple with a shortage of  hard drives.

Currency Risk. In the past, the risk of currency fluctuation was minimal in China because the central bank kept the yuan rigidly pegged to the U.S. dollar. But in 2005, Beijing allowed the yuan to fluctuate. Since then, the yuan has appreciated about 30% against the dollar.

Discussion questions:

1. How can OM help the US recapture manufacturing jobs?

2. What advantages does China retain in manufacturing, and what are the advatages of producing here?

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