Winning the race to the bottom

Low wages in states such as Mississippi, Alabama and South Carolina, and rising wages and worker unrest in China, may cancel out the cost advantage of locating factories in China, according to the Boston Consulting Group, a management consultant firm.

In short, the United States is competing by driving down the earnings of American workers rather than on the basis of superior inventiveness, productivity and management.

Here is the situation, as reported by Labor Notes:

Wages for China’s factory workers certainly aren’t going to rise to U.S. levels soon.  BCG estimates they will be 17 percent of the projected U.S. manufacturing average—$26 an hour for wages and benefits—by 2015.

But because American workers have higher productivity, and since rising fuel prices are making it even more expensive to ship goods half way around the world, costs in the two countries are converging fast. …

BCG bluntly praises Mississippi’s “flexible unions/workers, minimal wage growth, and high worker productivity,” estimating that in four years, workers in China’s fast-growing Yangtze River Delta will cost only 31 percent less than Mississippi workers.

That’s before you figure in shipping, duties, and possible quality issues. Add it all up, says BCG, and “China will no longer be the default low-cost manufacturing location.”

Labor costs typically are only 10 to 15 percent of the total cost of a manufactured product, so a small wage differential doesn’t make a big difference.

The American Old South has historically competed on the basis of a docile and low-paid work force, but the Labor Notes article points out that wages are being driven down in the North as well as the South.  Ford and GM have factories in Michigan using outside contractors who pay new hires $10 an hour.  An Ohio businessman is relocating a factory from China back to Ohio, after putting together a supply chain in which laborers are paid $7.50 an hour, assemblers $10 and programmers $16.  Minimum wage is $7.25 an hour.

Executive Director Scott Paul [of the American Alliance for Manufacturing] says there’s no hard evidence yet that manufacturers are actually returning from China in enough numbers to constitute a trend.

Rather, various consultants are now telling their clients to consider the U.S.  They’re the same consulting class that “popped up around the time of NAFTA with ‘yes you can in Yucatan,’ ” he said.

Paul cites the factors that could converge to bring more work to these shores:

  • Costs of labor and commodities are rising on the Chinese coasts, as workers demand higher pay. If companies move further inland to poorer areas, they hike their logistics costs.
  • In most of the world, the dollar is worth 25 percent less than three years ago, and in China 5 percent less.
  • Shipping costs are increasing because of rising energy costs.
  • Companies fear that in China they’ll lose their intellectual property to spin-off competitors.
  • Some consumers prefer an American-made product.
  • The U.S. has an abundance of skilled but unemployed workers.
  • And U.S. wages are stagnant or even falling.

But, Paul notes, if companies choose to build in the lowest-cost states—as Japanese automakers have done for nearly 30 years—“it quickly becomes a state vs. state competition, a race to the bottom. If South Carolina can offer lower wages, so can Mexico.”

Most countries have national strategies to build up their manufacturing industries.  The United States does not.  The U.S. government is active in protecting U.S.-based banks from losses on foreign loans, and U.S. technology, media and drug companies from infringement on their intellectual property rights.  But as for protecting the jobs of U.S. workers, the attitude is laissez faire – leave them to cope on their own.

Click on Next Low-Wage Haven: the USA for the complete Labor Notes article.

Click on Made in America, Again PDF for the full Boston Consulting Group study.

Click on Made in the USA, Again: Why Manufacturing Will Return to the United States for the Boston Consulting Group’s press release on its study.

Click on Manufacturing Renaissance for a Boston Consulting Group update on its study.

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