Supply Excellence
← New Supply Risk: Losing Your Top Talent Buschwhacked: Jason Defends Spend Analysis Against ERP Falsities →

Could the U.S. Be the Next Low Cost Country?

July 21st, 2006 · by Tim Minahan · 9 Comments · best practices, enviro/social sustainability, sourcing, supply management

I have long been a student of global sourcing strategies, actively tracking moves by some of the largest U.S. companies to identify and develop suppliers in emerging regions with attractive labor arbitrage benefits, such as China, Malaysia, India, and Eastern Europe. However, there are early indications that a sluggish domestic economy, rising energy prices, and tightening financial policies are transforming the U.S. into an attractive supply and manufacturing region for foreign companies. 

New trade data indicates that the weaker dollar and strong economic growth are conspiring to increase demand for U.S.-produced products. An article in Wall Street Journal this week indicates that U.S. exports of goods are up 10% this year. Exports of capital goods – such as construction equipment, machinery, tools, and software – are running 15% above last year levels. 

Even low-cost countries are now trying to capitalize on the weaker U.S. dollar by snatching up machinery and software from U.S. manufacturers in order to foster their next wave of growth. The U.S. Commerce Department reports that China and Brazil have boosted their purchases of U.S. equipment by 16% and 31%, respectively, during the first five months of this year. 

(LCCS pioneer United Technologies Corp. attributes recent earnings growth to high demand from these emerging markets. While much of this growth is due to the above economic factors, it reinforces the fact the strategy to have supply management lead companies into emerging markets and set up local supply lines – before fully capitalizing on sales in those markets.) 

These same factors are encouraging foreign businesses to outsource or set up manufacturing in the U.S. The greatest evidence or this trend is within the auto industry. While Detroit is attempting to cure their ills by sourcing more assemblies and parts from emerging markets like China, foreign automakers are moving to set up shop and source supplies in the U.S. 

It’s difficult to open a business magazine without seeing an article or advertisement in which Honda or Toyota is touting recent expansions in their U.S.-based manufacturing capacity. Honda this month announced plans to open its 14th manufacturing plant in North America – this time in Indiana. The news follows a similar announcement earlier this year from Toyota, which said it would open its 13th North American manufacturing plant. 

The Japanese automakers are also increasing the local “U.S. content” within their vehicles. A recent Detroit Free Press article reported that Toyota now spends $20 billion annually with North American parts suppliers, an increase of 400% from a decade ago. 

These moves further buoy Spend Matters champion Jason Busch’s claims that low-cost country sourcing will disappear. Says Jason: “In the future, overall country competitiveness and flexible strategies will trump labor costs.” 

With the wage rate for an average GM factory worker running $74 per hour versus $3.50 for a factory worker in China, it’s clear that these Japanese transplants are not coming to America to lower manufacturing costs. Their motivation for this seemingly counter-intuitive supply management strategy is much more business savvy. 

Toyota and Honda are using their supply and manufacturing strategies to help accelerate truck and automotive sales in one of the hottest consumer markets on the planet. How? By demonstrating social responsibility and investment in local U.S. markets, particularly those ripe with manual laborers, rising unemployment, and favorable tax policies. 

This supply strategy seems to be paying off. In a matter of 20 years, these Japanese transplants have gone from being the enemy of U.S. businesses and communities (particularly in the Midwest) to becoming the favored customers and automakers in America. Strategic supply management and manufacturing moves (coupled with producing high quality vehicles) have made Toyota and Honda vehicles top-sellers in the U.S. 

U.S. manufacturers will be wise to consider similar socially responsible supply management and manufacturing strategies in developed and emerging markets around the globe.

Email Forward & Bookmarks
[del.icio.us] [Digg] [Facebook] [Google] [Reddit] [StumbleUpon] [Technorati] [Email] More »

Tags:

9 responses so far ↓

  • 1 Jeremy Brofford // Jul 21, 2006 at 11:25 am

    Nice post. I agree 100% with you.

    How can you operate under a JIT or lean manufacturing environment when you are waiting for parts to arrive from China? Your forecasts better be spot on…good luck with that! I hate to get in a total cost discussion but the problem with the purchasing profession is that cost savings is almost always the number one objective in practice and alligning your supply management objectives with the needs of the business is often an afterthought that buyers fight everyday as they expedite orders, scramble for domestic contigency supply, resolve quality issues, and increase safety stock. These non-value added activities have almost become core job responsibilities for purchasing professionals. I am certain that a large portion of buyers have not accounted for this or the opportunity costs associated with losing focus on more strategic initiatives in their total cost models.

    Don’t get me wrong, global sourcing/outsourcing is a tremendous opportunity for US companies to improve quality, reduce costs, gain access to new technologies / intelligence, get closer to global customers, etc as long as it is in allignment with the needs of the business. Conversely, these are the very same reasons we should expect to see more of the Hondas and Toyotas of the world investing in the US.

  • 2 Charles Dominick, SPSM // Jul 21, 2006 at 4:41 pm

    Good post, Tim.

    It is amazing what the free market will do.

    However, the global market is becoming less free thanks to the action of states who are choosing to massively raise their minimum wage, which will make US labor less attractive in the immediate future.

    For more of my thoughts on this, check out http://tinyurl.com/k6tak

  • 3 Supply Excellence » Is Near-Shoring Back in Vogue? // Sep 29, 2006 at 9:58 am

    [...] Ironically, the biggest moves to source from U.S. suppliers and increase manufacturing in the states seems to be coming from foreign-based companies. The highest profiles are Japanese automakers, like Toyota and Honda, which produced 3.7 million vehicles in North America last year. As noted in previous posts, Honda and Toyota each have more than a dozen manufacturing plants in North America. And both are building more U.S.-based capacity. Similar to the TLM approach, the Japanese transplants are now setting up shop in the Midwest, where there is an ample supply of skilled laborers due to bankruptcies and low-cost-country sourcing strategies of U.S. automakers and suppliers. [...]

  • 4 Supply Excellence » Supply Excellence Turns One // May 1, 2007 at 2:26 pm

    [...] 2. Could the U.S. Be the Next Low Cost Country? [...]

  • 5 Supply Excellence » Is Detroit the Next Global Sourcing Hot Spot? // Jun 12, 2007 at 8:01 am

    [...] When I first suggested that a declining dollar and aggressive offshoring by domestic companies could turn the U.S. into the next low cost country, many of you shrugged me off as some crackpot protectionist. [...]

  • 6 Supply Excellence » Sustainable Supply: There’s No Denying It // Aug 7, 2007 at 4:21 pm

    [...] I have chronicled on Supply Excellecne how companies like Hewlett-Packard, Toyota, Adobe Software, Microsoft, Google, Wal-Mart, and others have used sustainable supply strategies for a competitive advantage. I have even shown how supply management organizations, like HP and Airbus, are beginning to use environmental and social responsibility as part of their supplier selection and performance measures. [...]

  • 7 Supply Excellence » Fear and Loathing in Strategic Sourcing // Aug 16, 2007 at 9:28 am

    [...] While quality is one issue, concerns over currency fluctuation, labor cost increases, transportation delays, and intellectual property theft are causing supply managers in all industries to take pause on their China sourcing plans. As early as last year, I predicted that the sagging dollar and an abundance of skilled workers and manufacturing capacity could spark a U.S. sourcing revival. [...]

  • 8 Supply Excellence » U.S. Looking More Like Global Sourcing Hotspot // Jan 16, 2008 at 10:48 am

    [...] Two years ago, when I suggested that a declining dollar and rising wage and capacity constraints in emerging markets could make the U.S. an attractive “low-cost” region for foreign manufacturers, most of you painted me as Chicken Little. Last year, I awoken your skepticism when I suggested that Detroit and regions of the South that had been abandoned by U.S. automakers for places like China and India would attract more foreign manufacturers due to a skilled and under-employed workforce, aggressive tax breaks, and proximity to the world’s biggest consumer market. [...]

  • 9 Supply Excellence — Supply Networks: Get Dynamic or Die // Jul 8, 2008 at 9:13 pm

    [...] The cover story in BusinessWeek this week asks the question we’ve been asking for a while: “Is it time to relocate manufacturing and supply back to the U.S.?” [...]

Leave a Comment