Rising labor costs in China have some U.S. manufacturers looking domestically for outsourcing alternatives.
Thanks to low labor costs and excellent export infrastructure, China has long attracted U.S.-based manufacturers, including medical device makers, looking to cut costs by outsourcing production of components produced in high volume.
But the “world’s factory,” as China is sometimes called, isn’t the low-cost manufacturing solution it once was, say analyst Julia Wall and Shririam Venkataramana, medtech insights manager, of healthcare insights and analysis firm Decision Resources Group.
“Chinese wages and the value of Chinese currency are rising dramatically,” says Wall, adding that Boston Consulting Group found that a government mandate to raise the minimum wage could bring labor cost increases of 15–20% per year in Chinese factories.
At the same time, freight and other costs associated with offshore manufacturing are continuing to rise. Add in other downsides of doing business in China, such as intellectual property protection and quality control, and it’s no surprise that American companies are increasingly looking for outsourcing partners on their own shores.
“The decreasing cost benefit of manufacturing in China is influencing U.S.-based manufacturers to move production back home,” Wall says.
But not all manufacturing is coming back to the United States.
“The shift back to U.S.-based production is particularly salient for products manufactured specifically for the U.S. market,” Venkataramana says. This reduces shipping costs and challenges, gives OEMs a tighter grip on quality control, and allows them to take advantages of improving efficiencies in U.S.-based manufacturing.
Venkataramana cites big companies such as Apple and Ford as examples of the onshoring trend. The computer giant recently brought some of its assembly work back to the United States and the automaker plans to return 2000 jobs to American shores.
“Shifts in medical device manufacturing will follow,” Venkataramana predicts.
Wall and Venkataramana will lead a conference session on understanding the dynamics of outsourcing in emerging markets at MD&M East in New York City on Monday, June 9, 2014.
—Jamie Hartford, managing editor, MD+DI
[image courtesy of RENJITH KRISHNAN]