Suppliers Rethinking Low-Wage Quest

Low-cost labor may not be all it’s cracked up to be.

That message, delivered repeatedly these days at industry confabs and seminars, doesn’t signal manufacturing’s exodus from developed countries is over. But it does mean the movement could be a little more tempered and a lot more strategic than what was foreseen a decade ago.

Throughout the 1990s, automotive suppliers seemingly couldn’t get out of town fast enough. The theory was the only way to compete with low-cost parts and components made in Asia and Mexico was to be there too.

That led to a number of American parts makers locating plants in emerging markets overseas, as auto makers scoured the globe for low-cost sources of components. And it produced dire predictions U.S. manufacturing was doomed.

But the strategy seems to be shifting, and more and more, suppliers are looking at plants in places such as China as the basis for serving the local market and region, and less as an export base for shipment back to the U.S.

The problem with the rush overseas, experts and insiders say, is that suppliers often ignored the big picture. In the frantic pursuit of lower wages, parts makers failed to factor in the cost of relocating management and shipping components halfway around the world. And they often underestimated the difficulty of finding local suppliers of their own that could meet quality and delivery requirements.

“In the 1990s, many suppliers moved operations to Mexico, but it didn’t work out well because their culture didn’t change,” says General Motors purchasing chief Bo Andersson, noting many parts makers didn’t achieve the desired equation of lower net cost and higher quality. “The goal isn’t to use cheap labor but to win business.”

Suppliers now realize developing countries eventually develop, so building a business case around inexpensive labor may not be the best long-term strategy, anyway.

“The competitive edge of China will only last for another 15 or 20 years, maybe less,” says Linda Hasenfratz, CEO of Canadian parts maker Linamar. “Chasing low-cost labor will never pay off in the long term.”

Does all this mean suppliers won’t be moving manufacturing offshore or that auto makers won’t be combing developing markets for low-cost parts? Of course not. Hourly wages of $2.50 in Mexico and 88 cents in China will continue to be a draw for many.

And it doesn’t mean suppliers native to China and India won’t be looking to break into the North American market. They will, and in many cases they already are succeeding.

But it is an indication parts manufacturers should think twice and do the math before rushing to set up new plants in far off lands with exporting in mind.

“The logistics (costs) involved is significant,” says Neil DeKoker, the head of the Original Equipment Suppliers Assn. “What we heard for years is that (savings from producing in China) would be 25%-30%. But the reality is, you’re lucky to achieve 10% savings.”

And that may have some suppliers looking for other answers.

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