So, Where Are You Gonna Make It?
I often speak with companies that have come up with a product, and are trying to figure out where to manufacture it. These are usually small Hawaii firms and it generally doesn’t make much sense to manufacture something on a small island in the Pacific if your likely customers are thousands of miles away. Most of these companies look to China and make a bee-line for Shenzhen. That’s a well trodden path and I know several companies that have done very well getting their stuff made in China. I’m reminded of my friend whose company has their Hawaii tourist-oriented products made in China: stuff like artificial leis, perfume, stuffed animals. There is another who is getting telecom equipment manufactured by Chinese suppliers. And still another that gets plastic cake pans made there.
But China may no longer be the place to go. (Or India, for that matter. Mainland U.S. firms tend to think of India more than Hawaii companies do.) Strategy+Business has issued an article by Kevin Stringer (registration required, but it’s free) that casts considerable doubt on whether we should look to India or China for future offshore manufacturing, making a cogent argument for sources such as Taiwan, Singapore or Estonia. Stringer’s argument, briefly, is that China and India both suffer from high labor training costs and lower labor productivity than smaller, more developed countries. Let’s take a look at what he has to say, first at labor costs.
Labor cost savings in China and India are transitory. Yeah, they may look cheap now, but pay rises in recent years are up to 20% a year for some specialties, so you can’t count on cheap labor for the long term. But the real cost of labor is in the need for training your work force. India is famous as a site for international call centers, yet these centers see up to 80% labor turnover every year. That’s a lot of training to do just to keep at your current performance level. The bigger cost, however, comes in trying to find sufficiently educated personnel for the more high tech needs of manufacturing and product research and development. Stringer uses the Philippines as an example. He points out that China has a population 16 times that of the Philippines, but only has three times as many well-trained, English-speaking engineers.
Are their grads good enough?
Education systems in Chindia simply aren’t keeping up with demand. India generates huge numbers of graduates, but that doesn’t mean they are ready to work productively. Stringer cites Indian studies that reveal that perhaps 5% of India’s work force has basic vocational skills. Three-quarters of German workers boast those skills, 68% in the United States, and a whopping 96% in South Korea. Better plan to invest in training. Another study points out that only 10% of engineers in China and 25% in India possess sufficient skills to work for multilateral corporations, while Hungary and Poland both top 50%. India’s 61% literacy rate doesn’t begin to compare with Singapore’s 92.5%, 96.1% in Taiwan or Estonia’s magnificent 99.8% literacy.
Now that we know training is going to be needed, let’s take a look at labor productivity. We all hear about the long hours worked in China and India, and unconsciously assume that the extra time makes up for lower productivity. It doesn’t. Stringer cites an OECD study that measured GDP/hour as a proxy for productivity, based on U.S. productivity being 100. India came out at only 7, China slightly better at 8. Pretty pathetic. Estonia scored just shy of 41 compared to the United States, and Slovakia racked up over 53.
Stringer provides considerably more evidence. But the bottom line is to do your homework and don’t blindly leap to do business somewhere just because everybody else is going there. Dare to be different.
