NEW YORK (April 18, 2013) – In another sign that America is becoming more competitive in manufacturing, the United States is now equal to Mexico in “attractiveness” as a source for manufacturing operations and is on track to achieve cost parity with manufactured imports from China by 2015. However, before companies set up or move production from formerly favored locales, including China, they need to perform thorough, case-by-case analyses as a number of critical factors -- including product type, location, transportation and other variables -- can greatly impact attractiveness and cost-effectiveness. That’s according to new research, including a survey of 137 C-level manufacturing-company executives and an in-depth economic and cost analysis, released today by AlixPartners, the global business advisory firm.
In the AlixPartners survey, 37% of manufacturing executives said they would choose the U.S. as their preferred location for nearshoring (defined as moving production of products closer to the U.S. consumer base). While an equal percentage of respondents cited Mexico as the most attractive nearshoring locale, the U.S. continues to post impressive gains versus perceptions of just a few years ago. In a similar AlixPartners survey last year, 49% of executives said they would choose Mexico, while 36% said they would choose the U.S. In the firm’s survey just two years ago, 63% chose Mexico, while only 19% said they would choose the U.S.
However, while AlixPartners’ accompanying economic and manufacturing cost analysis finds that some goods can indeed be manufactured at an equal or lower cost in Mexico than in China, many other types of products cannot. This provides clear evidence that in all cases, many factors need to be carefully analyzed and weighed before nearshoring or reshoring takes place.For example, AlixPartners found that while the “China cost” for items analyzed such as machined aluminum parts, plastic molded parts, non-denim slacks, and knit apparel and sweaters is indeed on the rise, that cost is still lower than Mexico’s in each case – and is forecast to remain lower through at least 2015.
“The U.S. is definitely a more cost-competitive source for manufacturing today than it has been in many, many years,” said Steve Maurer
, managing director at AlixPartners and leader of the firm’s Manufacturing Practice in the Americas. “In fact, the cost gap with China has on average been closed by approximately 70% for the products we analyzed.However, some consultants have taken that fact and tried to apply it with a broad brush across all of their clients and all of their clients’ products. As our analytical and product-specific research shows, that could be a big mistake.”
With a resounding 84% of the C-level executives surveyed by AlixPartners saying that the decision to nearshore their manufacturing would be an important one during the next year (versus just 53% who said the same last year), it is clear that nearshoring and reshoring decisions are moving to the “front burner” in 2013.According to AlixPartners, factors that need to be carefully analyzed before shifting production include product type, raw materials costs, labor costs, inventory costs, exchange rates, duties, freight costs and overhead costs, among others.
“Without question, these are absolutely critical decisions for company leaders. When it comes to moving production, companies should look twice before they leap,” said Foster Finley
, managing director at AlixPartners and leader of the firm’s Supply Chain Practice in the Americas. “Not only do product-cost variables vary widely by product type, but several factors, such as exchange rates, materials costs and labor agreements, can all have a dramatic impact on the outcome.”
Approximately 58% of the respondents to the AlixPartners survey said that for production that has either already been nearshored or is being considered for nearshoring, they have either reduced or expect to reduce their total “landed cost” by 5% to 20%. Landed cost is the calculation of all aspects of bringing a product to its point of sale, including transportation costs, duties and the expense of inventory in transit.
Regarding landed costs, AlixPartners’ research showed that a number of other variables need to be considered by executives before making nearshoring decisions. While rising production costs, today’s exchange rates and the cost of transporting goods currently make China a more expensive product source than it was a decade ago, it remains important to consider future costs when making sourcing decisions, says the firm.
But, if current trends remain in place, AlixPartners finds that, on average, by 2015 the cost of importing manufactured products from China will be about the same as manufacturing them in the U.S.However, other key low-cost countries, such as Mexico and India, will remain highly competitive, thus highlighting the need for case-by-case analyses when evaluating nearshoring.According to AlixPartners’ analysis, Mexico and India have maintained cost advantages vis-à-vis China of 15% to 20%, similar to the advantage levels China enjoyed over other low-cost countries in the early 2000s.
Furthermore, according to AlixPartners, even when economic advantages are clear and risks are low, there are significant barriers to nearshoring that must be considered, such as the often massive costs of switching manufacturing locations, and the current shortages in the U.S. of foundational manufacturing assets and of manufacturing talent and management.
About the Study
The AlixPartners Manufacturing-Sourcing Outlook analyzed manufacturing sourcing costs, patterns and expectations related to meeting U.S. demand.The Outlook includes data from the AlixPartners Manufacturing-Sourcing Index™, which analyzes a variety of manufactured products and compares the cost to build them in various low-cost countries and transport them to the U.S. versus the cost of manufacturing them in the U.S., tracking several key cost drivers.Those drivers include labor costs, transportation costs, raw-materials costs, inventory costs, capital-equipment costs, overhead costs, duties and exchange rates.The Outlook also included an online survey, conducted in March, of 137 C-level executives from manufacturing-related companies across more than 10 industries.Among the companies represented in the survey, approximately half had annual revenue of $1 billion or more, and all of the respondents said they sourced production across multiple continents.