Manufacturing in countries like China, Vietnam, and Bangladesh is ubiquitous. A massive chunk of the world's manufacturing is done in countries other than the United States. It is because labor prices are so much lower overseas. There are certain advantages to manufacturing in the U.S. and disadvantages to consider when looking abroad for outsourced production.
Mention the word "U.S." to most people, and their ears perk up with interest. Manufacturing is an integral part of many U.S. companies' business plans, whether a consumer electronics firm like Dell or a pharmaceutical outfit like Pfizer. No matter what your business is—and it may be surprising that many companies in this country don't manufacture anything—manufacturing requires skilled labor and expensive machinery, software, and other equipment.
Pros and Cons of Overseas and U.S. Manufacturing
Since manufacturers have gone overseas, the playing field has been increasingly level in international competition. However, not all companies benefit from outsourcing their manufacturing. There are numerous advantages and disadvantages to consider when deciding whether or not to move to manufacture overseas. Here are some of the pros and cons that come with this decision.
One of the main advantages of outsourcing manufacturing is cost savings. Because most companies selling products worldwide are trading at close to the same price, it's a little cheaper for manufacturers to outsource their work than to make it themselves. For example, if an American company wants to make a product that sells for $12 and the raw materials used in creating the item cost $5. Then labor costs another 10%, the company would lose money if they went through with making it themselves versus outsourcing production. However, if the company went through outsourcing this item, they would profit. In other words, it's always better to outsource production than to try and make it yourself.
When manufacturing overseas, you will have many more options when deciding what becomes the final product. For example, if you want a specific model of smartphone manufactured in China and then shipped back to the United States for U.S. sales, there is no way for you to make that decision. However, as a company, you can take that flexibility and decide where your product will be manufactured and then determine how it will be shipped back to the domestic market for distribution.
Faster and better quality
The most significant advantage to outsourcing production is the faster turnaround time and the improved quality of goods. These days, most companies have their products manufactured overseas to get their products created faster and with better quality. Because most manufacturing takes place in countries closer to your market, the product will be available sooner. Faster availability means more sales, and more sales mean higher profits. It also means that you can have a higher quality product because the manufacturer uses parts with fewer defects. In addition, many manufacturers are adding additional features to their products just for distribution in specific markets.
Because the idea of outsourcing manufacturing is to get products made and shipped to different markets quickly, this means you have the flexibility to sell your products internationally. It is a significant advantage because it means you can start earning profits in other countries and use local distribution channels. The best way to sell internationally is through local distributors. It also connects you in the market and helps build your brand image.
Because you are outsourcing production, you are taking a lot of the risk out of the process. For example, you have no idea what your labor costs will be if you manufacture your product in-house. However, manufacturers tell you the price based on everything in the final product when you outsource production overseas. If a particular part is overpriced, then it's up to them and not to you to make sure they're charging a fair price for their labor.
The quality of goods produced overseas is often lower than those produced domestically. It is why most companies hire independent inspectors or have their workers inspect the quality before shipping the item back to their domestic market. Often, this process can take a lot of time and cost more money than it's worth to ensure better quality control. It also means that if you are not guaranteeing that your product is high-quality, you might as well stay at home with your production lines and create your product.
There are many language and communication barriers when dealing with foreign manufacturers. Most of the time, this means that you will have to work closely with your manufacturer to make sure they understand your expectations and what your policies are. If you don't have someone on-hand who can communicate in their native language, you will have to find someone who can translate what they say back into English or your language.
Most companies use intermediaries to help them communicate when dealing with their offshore manufacturers. It means that at some point, you will have to trust that your middleman is doing what you want and sharing what you are telling them to the manufacturer. In addition, if there's a language barrier between the manufacturer and your agent, then there's an even greater chance of miscommunication. However, if your agent is based in the country of production, this sort of miscommunication will be less likely to occur.
Another major disadvantage to outsourcing is its time to have it done. It can include many hours spent on the phone with an intermediary and your manufacturer. If you are not willing to work on the phone with them, then the task of communicating what you want and what you are paying for will be difficult. Also, if you want to ensure that everything is going smoothly and that you get what you need out of your contract, it will take a lot of time to sort through all of the details.
Things to know about Overseas and U.S. Manufacturing
Overseas production has been on the rise in recent years, although all signs point to this trend likely ending in due time. While the United States still dominates manufacturing, this is not expected to last much longer given that other countries offer significant tax incentives and low-cost labor. With around 11 million Americans employed in manufacturing, one might argue that we are already dependent on foreign markets and outsourcing these jobs.
Global Manufacturing Locations
Other countries successfully compete with the U.S. in manufacturing and offer companies lower labor costs. China, for example, has an impressive presence of manufacturing at just about every sort of scale. The U.S. has also lost foreign sales to lower-cost manufacturing locations like Mexico and China. According to the U.S. Commerce Department, China is now ranked the second largest importer from the U.S. The United Arab Emirates and India also rank high on this list for import value.
Jobs Lost to Low-Cost Countries
According to the Trade Adjustment Assistance program, if you include the job losses from manufacturing being shifted overseas and jobs lost to outsourcing, between 2.7 and 3 million jobs have been lost since 1997. Many businesses are affected by this and cannot afford to pay the higher costs. We see a continuation of this trend in the coming years and more outsourcing of jobs within U.S. borders.
Foreign Market Share
We are not the only country vying for the manufacturing market. It is a big challenge for U.S. companies in particular. However, we have to keep in mind that since 1997 the United States has lost more than 8 million jobs due to outsourcing and competition from other countries. These numbers do not paint a very rosy picture of our manufacturing industry, and we see job losses in various sectors all over the country.
The most significant advantage of outsourcing may be that it is cheaper. If a company can make half of what it used to with the same number of employees. Many companies have moved jobs out of the U.S. and into countries where regulators are less involved in worker safety.
For nearly 25 years, this has been the pattern for over 33 years. Countries like China, Mexico, and India have been increasingly taking market share from the U.S. in manufacturing. With the increase in labor costs in China and Mexico, companies are starting to look at other countries for cheap labor. Countries like Vietnam and Egypt have begun popping up as new manufacturing locations. It is also a huge reason why many companies outsource their jobs.
Wage & Benefit Setbacks
While lower labor costs are attractive for companies looking to save, the fact is that workers do not see those savings. According to a recent U.S. Labor Department study, workers in China and Mexico earn no more than they would have in the United States while manufacturing jobs pay considerably less. It is one of the reasons why jobs are being lost to these countries and why workers continue to lose ground.
Challenges for International Manufacturers
While some companies are finding great success by outsourcing and producing overseas, this is not always the case. Many companies find the cost savings of outsourcing offset by rising costs like shipping products from overseas. It can lead to higher overall costs, making it more difficult for a business to compete in the market. While it may be cheaper to produce goods in China or Mexico, transportation is a considerable expense and often takes away from the overall savings.
Pros and Cons – In a glimpse
Most people who work in the manufacturing industry overseas have many benefits over those in the U.S., but they also have some drawbacks. This blog discusses the pros and cons of both sides to determine which side is better suited to your needs.
- Having fewer constraints placed on you, especially when it comes to production, quality control, and resources (e.g., money and time)
- Lower costs in labor, shipping, and materials
- Better quality control on products because they are manufactured overseas compared to their U.S. counterparts
- If the company is selling a variety of products (e.g., you're an import/export company), you can offer a better range of product varieties as opposed to if you're a domestic manufacturer who has a finite amount of product variations in your line list
- Easier access to markets (i.e., you don't have to deal with tariffs and customs red tape)
- Lower tax rates for companies that are based overseas
- Better work-life balance as you can set your business hours, making it more flexible for employees.
- Ability to have multiple banks and shareholders from around the world to attract investors and funding (i.e., sovereign wealth funds, pension funds, etc.)
- Higher cost of labor and materials than in the U.S.
- More limitations are posed on businesses as they are generally required to have a one-year history and have a higher wage base than domestic companies.
- Lower availability of materials, especially in smaller manufacturing operations where most of the manufactured products are not mass-produced but rather custom designed.
- A high amount of bureaucracy with local customs, shipping, and regulatory issues (i.e., bribes)
- Higher costs for shipping due to stringent compliance policies that customs follow.
- Higher costs for shipping repainted products back to the U.S. due to longer lead time and higher costs of repainting overseas
- Longer delivery times when it comes to shipping new products (upwards of 6 weeks)
"The best option is a plant in China, where costs are about 30 percent less than the U.S. I would be very cautious about going to Mexico. It is a good place to invest for five years, but you may have trouble getting out of the country."
Finally, people who work in the U.S. manufacturing industry have better protection from labor unions than those who work overseas.
The above article highlights many important points that many companies should consider when deciding where to manufacture their products.
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