Industrial Insight

Buying China is getting expensive… | March 9, 2011

http://arstechnica.com/tech-policy/news/2011/03/in-early-2010-somewhere-high.ars/

Made in America: small businesses buck the offshoring trend

By Brendan I. Koerner, wired.com | Last updated 2 days ago

“If you’re a huge company like Apple, you can get the whole factory to work for you,” says Paul King, founder of Hercules Networks, a New York company that makes charging kiosks for mobile devices. “You can put your own process in place, you can have your own quality control. But without that kind of power, you’re just another customer, and they don’t really care.”

To deal with their production backlogs, many Chinese factories have started subcontracting work to facilities located in the center and western areas of the country, where labor costs are cheaper than on the industrialized coasts. But this usually makes the problems even worse. “They’ll subcontract your work without providing the subcontractor with the same training that you provided to them,” says George T. Haley, a professor of industrial and international marketing at the University of New Haven who specializes in Chinese business. “Then all of a sudden, your quality assurance goes all to hell.”

When you include all the various drawbacks and costs that don’t appear in a factory’s price quote, manufacturing certain high tech goods in China can end up being surprisingly expensive. In 2008, three McKinsey consultants analyzed the production of midrange servers, taking into account everything from shipping to quality to exchange rates. They concluded that fabricating such devices in China made sense in 2003, when the required labor was 60 percent cheaper there than in the US. At that time, they estimated, the per-unit savings ran about $64. But this advantage, McKinsey concluded, had vanished by 2008: “After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative—a burden of an extra $16.”

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I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.

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