Why US manufacturers are nixing the US for China
Robotics and the devalued yuan are lowering manufacturing costs in this Asian production hub.
Elaine Pofeldt, special to CNBC.com
Monday, 21 Sep 2015 | 10:00 AM ETCNBC.com
On the hunt for a factory to manufacture her "smartwatch for Grandma," Jean Anne Booth headed to China recently to check out several facilities. "If you're going to build that level of technology,
China is really the place to go for cost effectiveness and capability for what it is we're doing," said Booth, the CEO of four-employee UnaliWear, a two-year-old firm in Austin, Texas.
Booth, a veteran of the semiconductor industry, may soon find an even greater incentive to manufacture overseas if current economic trends continue. The recent devaluation of the yuan is expected to drive manufacturing costs lower in China, where average yearly wages in manufacturing rose from 15,757 renminbi in 2006 to 51,369 renminbi in 2015, according to Trading Economics, a global economics research firm in New York City. That is equivalent to a jump from $2,472 to $8,060.
"Chinese factories are cutting prices," said attorney Daniel Harris, a partner and founder at Harris Moure in Seattle, which advises manufacturing clients and others on doing business in China. Harris is also co-author of the popular
China Law Blog. "Their costs are going down. People are upping their manufacturing in China. We see this in our practice."
In July the U.S. imported
$41 billion worth of goods from China. That was up from $40.5 billion the same month last year. However, with China's manufacturers seeing new orders and exports dip in August and the steepest declines in new output since November 2011, softer demand led to "marked" falls in both costs and charges by factories, according to
Markit, a provider of financial information services. The Producer Price Index, which tracks changes in manufacturing prices, fell by 5.9 percent in August from the same time in 2014, the biggest
decline since the global financial crisis in 2009.
"The recent devaluation of the yuan is expected to drive manufacturing costs lower in China." -Trading Economics
One reason for declining manufacturing costs in China is that it is shifting more of its production to robots, counterbalancing the effects of rising wages. In a report to be released later this month, the International Federation of Robotics found that China accounted for 25 percent of industrial robot sales in the world in 2014 and had purchased about 56,000 units, with the automotive industry the leading buyer. China's share of the world's robots is up from last year's
20 percent, which made China the country with the largest percentage of the world's industrial robots.
That said, it may take a while before many U.S. manufacturers ramp up their production in China significantly. For one thing, many manufacturers in China aren't likely to dangle price breaks to U.S. firms easily, even when declining overhead justifies it, according to Gary Young, president of Avela, which has helped companies source products and services in China since 2002 and has offices in Houston and Shanghai. Often, he has found, U.S. firms find there is resistance when they try to renegotiate deals with Chinese manufacturers whose costs are declining.
"There's always pushback," said Young. "For the most part, manufacturers' profit margins are pretty small. They are anywhere from 4 percent to 12 percent. That's all the profit margin they have. They guard that. That's their lifeblood."
He added, "Everything is a negotiation. It can take a couple of days. They try to wear you down. Their attitude is, 'You're an American. You're rich. You really shouldn't even be doing this.'"
Certainly, even with the potential for lower costs, not every manufacturer wants to make products in China. "There is supply-chain risk," said Greg Cullison, a senior executive at Big Sky Associates, an operations management advisory firm in Charlotte, North Carolina, and Washington, D.C., and an expert in geopolitical risk analysis. "China is very far away. You have to consider the shipment costs. Are you going to be subject to export tariffs or delays, which are actually costly in shipping the goods?"
Nas Siqueira, co-founder of Los Angeles-based
Nawi Kids, recently opted out of a potential deal to manufacture her stuffed toys, blankets and other baby products at about one-fourth of her current manufacturing costs, though she already had a Chinese factory lined up and samples made. "I didn't want to not know how it was made and who was making it," said Siqueira.
Instead, her three-person firm, founded about two years ago, contracts out the cutting, sewing and other production work to about 26 people who work locally. "I'm really lucky being in Los Angeles now," she said. "We have manufacturing coming back. I was really lucky to have found people who could do everything, including toys, which are hard to do. I couldn't really see myself putting my stuff in someone else's hands, not having met them."
Why US manufacturers are nixing the US for China
