U.S. manufacturing costs are now equal to Mexico and will be equal to China by 2015

Monday, April 22, 2013

In another sign that America is becoming more competitive in manufacturing, the U.S. is now equal to Mexico in “attractiveness” as a source for manufacturing operations and is on track to achieve cost parity with manufactured imports from China by 2015. That’s according to new research released by AlixPartners.

The report advises that before companies set up or move production they need to perform thorough, case-by-case analyses as a number of critical factors -- including product type, location, transportation and other variables -- that can greatly impact attractiveness and cost-effectiveness.

According to the survey, 37% of manufacturing executives said they would choose the U.S. as their preferred location for nearshoring (defined as moving production of products closer to the U.S. consumer base). While an equal percentage of respondents cited Mexico as the most attractive nearshoring locale, the U.S. continues to post impressive gains versus perceptions of just a few years ago. In the firm’s survey just two years ago, 63% chose Mexico, while only 19% said they would choose the U.S.

Accompanying economic and manufacturing cost analysis finds that some goods can indeed be manufactured at an equal or lower cost in Mexico than in China, many other types of products cannot. This provides clear evidence that in all cases, many factors need to be carefully analyzed and weighed before nearshoring or reshoring takes place. For example, while the “China cost” for items analyzed such as machined aluminum parts, plastic molded parts, non-denim slacks, and knit apparel and sweaters is indeed on the rise, that cost is still lower than Mexico’s in each case – and is forecast to remain lower through at least 2015.

“The U.S. is definitely a more cost-competitive source for manufacturing today than it has been in many, many years,” said Steve Maurer, managing director at AlixPartners and leader of the firm’s Manufacturing Practice in the Americas. “In fact, the cost gap with China has on average been closed by approximately 70% for the products we analyzed. However, some consultants have taken that fact and tried to apply it with a broad brush across all of their clients and all of their clients’ products. As our analytical and product-specific research shows, that could be a big mistake.”

With a resounding 84% of the C-level executives saying that the decision to nearshore their manufacturing would be an important one during the next year (versus just 53% who said the same last year), it is clear that nearshoring and reshoring decisions are moving to the “front burner” in 2013. Factors that need to be carefully analyzed before shifting production include product type, raw materials costs, labor costs, inventory costs, exchange rates, duties, freight costs and overhead costs, among others.

“Without question, these are absolutely critical decisions for company leaders. When it comes to moving production, companies should look twice before they leap,” said Foster Finley, managing director at AlixPartners and leader of the firm’s Supply Chain Practice in the Americas. “Not only do product-cost variables vary widely by product type, but several factors, such as exchange rates, materials costs and labor agreements, can all have a dramatic impact on the outcome.”

Approximately 58% of the respondents said that for production that has either already been nearshored or is being considered for nearshoring, they have either reduced or expect to reduce their total “landed cost” by 5% to 20%. Landed cost is the calculation of all aspects of bringing a product to its point of sale, including transportation costs, duties and the expense of inventory in transit.

If current trends remain in place, on average, by 2015 the cost of importing manufactured products from China will be about the same as manufacturing them in the U.S. However, other key low-cost countries, such as Mexico and India, will remain highly competitive, thus highlighting the need for case-by-case analyses when evaluating nearshoring.

Click here for the full report.