‘Tis not the season to reshore … yet – Global Sources

Reshoring naysayers believe China is still the place to be.

Yes, most US-owned and other foreign-invested factories are still in China. This is despite all the press that reshoring, often described as moving back production to the US, has been getting.

For many companies, including Flextronics, three factors stand out as their reasons for staying: strong vendor base, excellent infrastructure and skilled labor pool. Flextronics was founded in 1969 in California’s Silicon Valley. Its headquarters are now in Singapore.

These advantages are not lost even to suppliers of high-value products such as consumer electronics, automotive parts, construction equipment and appliances, segments said to be the most ideal “reshorers.”

For one, it is difficult to replicate China’s supply chain, with every material or component provider within proximity of the assembly or manufacturing facility. This easy accessibility is key in cutting costs.

“I just do not see how Apple and GE could stay cost competitive if they moved production away from China,” an executive from the mobile electronics industry said in an e-mail. “Apple and GE may be making more of a PR move than an actual large-scale production shift back to the US.”

The American Global Health Group has invested in aloe plantations in Guangdong and Hainan provinces, rendering relocation moot. There are three farms, covering about 500 acres altogether.

As for skills, the high level of worker sophistication in China helps offset the issue of rising wages there.

Many suppliers remain unfazed by the last, cited by industry observers as a primary driver of reshoring, as salaries in China are still significantly lower than in the US.

To illustrate, labor costs in the Pearl River Delta region, one of China’s traditional and largest manufacturing hubs, are roughly just one-tenth of what US workers make in an hour. This is despite the recent 10 percent increase in local labor rates. Factories in key cities within the PRD such as Shenzhen pay $2 per hour during the workweek and $3.10 on weekends and holidays. It is about $22 an hour in the US.

American Global holds on to these figures. In addition to its aloe farms, the company has a 20,000sqm production complex in Taishan, Guangdong, with close to 250 staff members. The plant was established in 2003.

Industry and financial analysts, however, advise makers to consider total costs and not just manufacturing wages when weighing reshoring pros and cons. In a report, the Boston Consulting Group said higher productivity, an increasingly flexible workforce, resilient corporate sector and other factors will help close out the wage gap between the US and China. BCG estimated that hourly factory salaries in the US will be $26.06 and $4.41 in China by 2015.

Silk Road Associates cited logistics as another reason to stay in China. SRA said in its report “The end of ‘Made-in-China’?” that the ability to deliver rapidly and promptly helps global retailers manage their inventories more efficiently, thereby lowering working capital costs. Unsold inventory, not factory wages, is one of the biggest costs for a retailer.

Made for China

Domestic interests also have a strong pull for many FIEs, which initially turned to China for export-oriented manufacturing.

The country is now a major market for American Global, forecast to account for 70 percent of sales of aloe-based cosmetic and skin care products.

Encouraged by growing domestic consumer spending, American Global “decreased US export share and raised the price of China products,” said Ms. Ma, a merchandiser for the company. The move has resulted in positive sales and profit projections, Ma added. America Global’s head office and international sales center are in Seattle, Washington. It was established in 1999.

China’s population of 1.3 billion is a big enough reason for Flextronics to stay put. A spokesperson said the company is “committed to operating in China where a billion consumers create a huge potential market.”

AmCham China has noticed this expanding China-centric orientation among FIEs participating in its annual Business Climate Survey.

Since 2010, the number of survey respondents with plans of producing goods in and for China has grown steadily. In 2012, two-thirds of AmCham China members selected this option, said communications director K.C. Swanson. “Most members view the China market as a long-term investment.”