By Kevin Meyer
I've told you story after story of companies that have focused on improving internal efficiencies instead of globetrotting to chase low labor cost... and succeeded to become globally competitive from North America. I continue to believe that the only legitimate reason to move overseas is to be closer to your customer. Lately we've all read several articles on labor cost inflation in China and elsewhere, and that's putting some of the outsource magicians on the defensive. As just one example:
Once again, the sky in the PRD [Pearl River Delta] seems to be falling. The breathless reporting about labor issues in China once again lays bare the western media’s propensity for myopia and mis-focus when it comes to reporting on China. But this time I can’t just blame the media… lots of people who actually manage facilities here are bitching and moaning about rising labor costs and worker empowerment, describing it as an an existential threat, which for most of us, it is not.
But what becomes really intriguing are the reasons WHY rising labor costs aren't an issue... I'll pick just a couple but pretty much all of them will make my eventual point.
Some reality checks:
Reality check #2: Whatever the cost increase, you can probably offset this increase, in whole or in part, by reducing waste and thereby adding value to your products and/or processes.
Reality check #4: Yes, Vietnam (the only serious competition to China) has lower labor costs than China and for some, manufacturing in Vietnam will be more competitive than in China. But not for everyone . There are other costs incurred in Vietnam that offset low labor rates, such as lower productivity and the costs associated with a relative lack of infrastructure and maturity in the supply chain.
Reality check #5: Again, with regards to Vietnam. What will likely happen when so many manufacturers from Taiwan, Korea, Japan and China make the move to Vietnam and start “consuming” the finite labor supply? Won’t market forces likely increase the labor rates there?
And the following leaps of faith:
Leap of faith #1: Better compensated workers will be more stable, and more willing to contribute to the company’s bottom line. These workers will be more likely to see a future in your facility, and will be more likely to learn how to create more value for the company in order to advance themselves.
Ok... is this as obvious to everyone else as it is to me? Aren't they basically the same reasons why a manufacturer shouldn't focus on labor cost and flee to China in the first place? Just as he says... labor cost, especially differential labor cost, usually isn't nearly as significant as the cost of unnecessary complexity. If you run away to a lower cost country, you run into other hidden problems. And at some point if enough companies chase low labor costs, those costs will inflate. If you compensate better, you get more value.
Brilliant! I couldn't have said it better myself!