China’s labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a China estimate.
Based on this information, I’ve concluded the following:
Before November 2006, China’s labor costs were rising 3% to 5% per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: for all 2006, costs rose nearly 16% with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: a 10% to 13% increase.
At this rate, China’s labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.
What does all this mean for your sourcing decisions?
More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts – and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore, because all of these geographies are becoming progressively intertwined from a regional perspective.
Here’s the bottom-line:
Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much? Who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.
If you need help with TCO or want to know more about what is going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.
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our company sees this building in FDI trend, OEM and tier 1 CM making large scale investment in other-than-China regions.
Dear Mr. Barnhart,
Thanks by the chance to discuss.
Do you have any consideration for Brazil when you forecast the impact on global manufacturing?
What I mean is, you have mentioned Mexico and Western Europe, but we need to remember that all important OEMs are here as: Foxconn, Flextronics, Celestica, Jabil, Elcoteq, JHT, Solectron, SCI Sanmina, Benchmark and others…
If you see the material from Adam Pick (Outsourcing in South America), is stated there how impressive this market can be. Living the market you can confirm this.
Why it was not included in you note?
Do you agree with Mr. Smith points?
Is it possible that rising labor cost in China, drives more business for Global OEMs in Brazil?
Thanks in advance,
Cesar Almeida
Siemens Brazil
With the rising cost of labor in China fast approaching the labor cost of Malaysia, Thailand, and Singapore, it seems like US manufacturers need to rethink the total cost of ownership for their contract manufacturing requirements. When you factor in the transcontinental shipping costs to export raw materials and to import finished goods, and factor in time lost due to long transit times, is it really cost effective to manufacture in China? Further complicating this process is the lack of a reliable supply chain, which is often broken due to a lack of materials, a lack of power to run the factory or the general lack of infrastructure needed to run a world class manufacturing center.
It would seem to me that outsourcing contract manufacturing to Mexico and other low cost North American facilities in the Caribbean or Central America would make more sense today. The reality seems to be that saving money by manufacturing in China is becoming more of a fantasy, and the head aches associated with manufacturing in Asia do not outweigh the benefits. I would rather see more emphasis on rebuilding the North American electronic manufacturing sector, providing more stability for the local economy, a more level playing field from a competitive manufacturing standpoint, and easier access to the market for US manufacturers.
Further complicating this process is the lack of a reliable supply chain, which is often broken due to a lack of materials, a lack of power to run the factory or the general lack of infrastructure needed to run a world class manufacturing center.
I totally agree.
I think a lot of companies simply make decisions on where they THINK their costs are, but they haven’t really consulted the hard-core facts. They’re simply following trends, but the trends can change incredibly quickly, and the trends don’t also show the real facts. Because some people wake up late, they follow the trend late, but by then all the numbers have changed and you’re going to end up doing more harm than good.
One reason for the rise is actually the demand. Most companies are into outsourcing and their primary choice of outsourced companies or personnel is China. Why? They used to be cheap yet quality of output isn’t sacrificed. And since the demand rose, it follows that the price will also rise. I wonder if the same trend will also happen in India and in other Asian countries.