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Rising Domestic Costs Ensure Continued Dominance Of Overseas Manufacturing

Much of the recent press about overseas manufacturing has primarily focused on how companies now perceive manufacturing products in the US to be less expensive than manufacturing them in China. For several years, pundits have repeatedly stated that wages in China are rising along with shipping costs, and this threatens to reverse the flow of goods. Some enterprising manufacturers have now started to switch back to US factories.

That being said, US companies actually face higher costs making products at home than they do abroad. Despite what some journalists have written, wages still have a great deal to do with this. Even with increased shipping costs, wages paid to Chinese workers remain lower than international averages and this helps to ensure lower costs in China for the foreseeable future. Lower oil prices have also helped to ensure Chinese manufacturing dominance.

Shipping Containers From China

Many of the high shipping cost estimates were made at a time when oil cost significantly more than it does today. At $200 per barrel, moving a single 40-foot container from China to the USA costs over $15,000, but oil is now trading at less than half this price. Even at a healthy $135 per barrel, it’s estimated that shipping a single 40-foot container would cost only $8,000. This doesn’t even take into account that bulk shippers are given substantial discounts to move products out of China.

Few US companies have such low production orders as to warrant only a single container. As a result many of these cost estimates don’t take economics of scale into account. Nevertheless these prices aren’t too absurd even when moving a single container.

Overseas Manufacturing Costs

According to US Bureau of Labor Statistics, Chinese employees made less than 10 percent of what domestic employees do at the time those figures were calculated. Most trends seemed to indicate this would remain true even if wages were to drop substantially in the United States.

Costs have also risen in the European Union as well as Japan. American businesses that export their products to those areas can possibly take better advantage of these higher costs by shipping products made in China rather than those made in the US.

Overall Cost of Manufacturing

Even the most alarmist predictions still suggest there is a real benefit to making products in China over the United States. Through the remainder of 2014, businesses can expect an 8% cost advantage from shipping products in China. Even the most stringent models show at least a 6% cost advantage going into next year. Costs in China may very well level off, especially considering the lower price of oil and domestic Chinese energy policies.

Minor Shipping Costs

When compared to the cost of American labor, even the highest estimates of overseas manufacturing shipping costs are relatively minor. Outsourcing work to China still makes good economic sense, and should continue to do so for the foreseeable future. US companies may ultimately end up spending more attempting to make products domestically than if they kept their operations in China, so contact ITI today to learn how you can reduce your manufacturing costs.

By | 2017-03-09T14:16:27+00:00 October 22nd, 2014|ITI News|

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