“Why is Everything Made In China?”

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My son has a fascination and knack for discovering where things are made, studying the fine print on every product he sees.  And lately, he’s become agitated with his agitated outcry:Outsource to China

Why is everything made in Chiiiiiiinnnnnnaaaa???

His parents give him the standard, simple answer:  “Cheap Labor.  That means cheap prices.”

There is some truth here for sure, but it really over-simplifies the off-shoring dilemma.

The fact is, depending on the type of product your manufacturing, labor is certainly a cost to manufacture a product, but it’s not the ENTIRE cost of goods.  If you’re dealing with a food product, labor may be less than 1/3 of the total cost.  The balance?

  • Overhead
  • Packaging
  • Materials

Then the cost to the end consumer is made up of a couple of other major components:

Variable Selling Expenses:

  • Transportation – To get the product to the customer (distributor, retailer)
  • Sales Commisions – To third party selling agents

The last major variable, and the biggest variable

  • A manufacturer’s expected profit Margin

Yet another variable, the retailers profit margin….

The China “labor factor” is certainly relevant.  But I would argue that the final consumer will see the end retail price move 5-15% (MAX) due to an off-shore model vs manufacturing in the good ‘ol USA.  And 15% is pushing it….

So why do manufacturers make the decision to move production off-shore?  Usually 2 reasons.

  1. Competitive pressure:  Their competitors are already there, so if they DON’T go off-sure they are at a disadvantage
  2. Customer Pressure: They value “made in the USA” but not enough to pay a premium to make it in the states.

Those are 2 valid reasons.  But at the underlying core is the following:

  • The products are not differentiated enough, so cost comparisons become a driving force on decision making
  • Since the products are not differentiated, the small %’s in cost difference are monumental to the business model.  Margins are tight, can’t absorb increases.  Margin is one of the critical metrics in business.  
  • The brands to not command an “emotional connection” with the end users.

In consumer products, Cost structures and Brand Value matter.  The brands that have both, an emotional connection and a lean cost structure tend to write their own ticket.  They have pricing power when costs move on them.  Their margins tend to be substantially stronger than competition.  As a result, they are not prisoners to the off-shoring pressure.

Lean cost structure + a Brand with an emotional connection to the consumer = a stable, sustainable margin.

It’s the holy grail of business.

 

An interesting read, geeky but data based study….

http://www.asiafloorwage.org/documents/Resources-onwages/Background_reading/onwage/The%20Impact%20of%20Substantial%20Labor%20Cost%20Increases.pdf

 

 

 

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