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The Hidden Costs of "Made In China"

Written By Jayeng Katon on Wednesday, July 10, 2013 | 1:25 PM

In the fashion industry, the vast majority of production is performed overseas, and of that, the indisputable lion’s share goes to China.  According to statistics, there are more than 100,000 garment manufacturers with decent capacity in China, which employ over 10 million people. In 2012, China made altogether 43.6 billion pieces of garments with an export value at $153.219 billion and sales value at 1.7 trillion yuán at domestic market. China has grown into the largest manufacturer, exporter and consumer of garment products throughout the world.

Much of this growth has been driven by reductions in US domestic garment manufacturing primarily due to labor costs. But I decided to ask the question; 

Does this still make sense?

In researching this topic, I came across an extremely compelling study performed by David Meeker, a lecturer at MIT.  In his study Meeker breaks down the manufacturing process and discovers that through advancing technologies in design, manufacture and assembly software systems, the Chinese manufacturing advantage is significantly reduced. Meeker outlines many of the additional and hidden costs involved in shifting production to China. They find that they add up to 24 percent of the total product price, a conservative number that "does not include provisions for many of the risks and intangible costs that relate to specific products," he says.

This percentage breaks down as follows;
  • 17% Shipping and Logistics
  •  4% Quality Issues
  • 1% Travel and Communications
  • 1% Viable Vendor
  • 1% Other

So if the initial calculated manufacturing cost advantage begins with that fully loaded labor rate savings of 67% and factor to an overall savings of between 8-10% against total cost of the same article manufactured in the US, Meeker’s analysis becomes extremely compelling whenever he shows that the savings associated with updated technology results in a decrease of 30.5% in Chinese manufacturing versus 36.8% in the US.

This virtually eliminates the Chinese advantage, and in many cases results in a slight savings in US manufacturing, which indicates a tremendous departure from previous years.

As larger parts of China begin to experience a middle-class existence, labor rates and benefit packages for workers are increasing. The strength of the US dollar versus foreign currencies is falling. Shipping rates, taxes, customs services and duties are increasing.  There are more regulations and bureaucracies, with new sets of rules.

Critically, companies are being required to share their most prized asset: their intellectual property, and many contract agreements protecting US businesses’ IP rights are not upheld in Chinese courts. High worker turnover increases training costs and reduces quality, with some facilities experiencing between 40 percent and 60 percent yearly turnover in staff.

Whenever you factor in the soft costs, such as complying with changing customs regulations, fines and penalties; geographic risks from natural disasters; logistical risks such as the availability of shipping and port capacity, clearing times and losses in transportation; poor infrastructure that leads to delays and quality issues; judicial, political and social instability; the growing problem of contract manufacturers making exact replicas for competitors; and the damage to brand that can occur with lapses in human rights, the argument for domestic manufacturing becomes extremely powerful.

Ultimately, whether or not your company decides to manufacture in the US or China, the results of Meeker’s study, and the conversation that his study and his speaking engagements are spurring, is both provocative as well as necessary. 

Will the US become the powerhouse of manufacturing that it once was?  Who knows… but with the landscape of garment manufacturing changing in such fundamental ways, one thing seems clear;

If you are performing your manufacturing in China right now, it may be time to reevaluate that decision.

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