Low Cost Production Locations May Not Be
For many years now, the management mantra “save costs by producing in low cost countries (LCC)” has ruled. A number of recent studies and news items makes me wonder if the LCC-wave is about to turn around. Consider this:
- Wages in many LCC have been increasing considerably for a number of years. (Earlier post)
- Companies expanding abroad cite access to resources and to growing markets as their motivation; cost reduction is often not a factor. (Earlier post)
- Lower quality and less flexibility in LCC manufacturing facilities often outweigh the reduced labor costs.
- Transplanting a highly-automated manufacturing process to an LCC adds no value, since labor costs play only a minor role; only manually intensive processes reduce costs in an LCC.
- Volumes in the LCC facilities are often lower than in the main facilities “at home”, reducing the scaling effect received with high volumes.
A report by the Fraunhofer Institute for System and Innovation Research comes to the conclusion that about 15% of German manufacturers with production facilities abroad are returning home. The Boston Consulting Group (in their study “Winning The Localization Game“) concludes that production in LCC is often just as expensive as producing abroad.
What do you think the chances are that the textile factories will return to the South-East of the US or the steel factories to Pittsburgh?
Image from rurdev.usda.gov
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