U.S. manufacturers are quickly closing a cost gap that has long put them at a disadvantage against facilities in low-cost countries and may actually be on par with China-based sites within four years if certain trends hold. That's according to The AlixPartners 2011 U.S. Manufacturing-Outsourcing Cost Index, a study soon to be released.
The consulting firm examined manufacturing costs in 12 countries (U.S., China, Mexico, Brazil, India, Vietnam, Singapore, South Korea, Russia, Hungary, Czech Republic, Romania) among makers of fabricated parts, assemblies and consumer products. According to the report, as a result of China's fall from its perch as the obvious best global solution for manufacturing operations and the eroding cost advantage of low-cost countries in general, U.S. companies are increasingly opting to pursue "near-shoring" strategies, favoring production sites in Mexico, and looking more seriously at domestic investment.
Due to a weak dollar and wage inflation in low-cost countries, the cost competitiveness of U.S. manufacturers clearly is getting stronger, though Mexico remains the most competitive country globally when it comes to "landed cost" - the total cost of the average shipment, including purchase price, freight, insurance and other costs absorbed en route to the port of destination. According to AlixPartners, emerging low-cost countries like India, Vietnam, Russia and Romania are now more competitive than China, but continue to lag Mexico.
U.S. manufacturers are benefiting from stabilization in logistics and materials costs, while China is seeing its "landed cost" rise as a result of wage inflation (15 percent to 30 percent annually), exchange rate pressures and higher freight costs.
Even if wages in China continued on an upward spiral of 30 percent annually through 2015, the country would still enjoy a "landed cost" advantage against the U.S. of some 10 percent. But, annual wage jumps of 30 percent, coupled with a rising yuan against the dollar and average annual increases of 5 percent in freight costs, would put China's "landed cost" on par with U.S. manufacturers within four short years.
