US-China Cost Convergence: Getting Closer

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Mark Muro has an interesting post on Brookings.com where he discusses some new data suggesting that US-China manufacturing cost convergence is happening, at least in some sectors.

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Notes Muro:

new paper just published in the Journal of Power Sources contains new information about the global advanced battery manufacturing industry derived some fresh reporting: the authors’ face-to-face interviews with managers in battery manufacturing plants in China and the United States….According to Brodd and Helou’s exhaustive drill down, U.S. wage costs are clearly higher than those in China, but the heavy automation of a current-practice Li-ion battery plants reduces the number of needed workers, and so reduces that gap. Meanwhile, while materials costs in the United States  and China are identical, China’s high energy and logistics prices essentially erase China’s price advantage. On the energy front, Brodd and Helou’s reporting concludes that a facility producing 350 million battery cells in China would have approximately $1.5 million higher electricity costs than one in the United States. Relatedly, they note that high energy prices and fragmentation in the Chinese logistics industry ensure that trucking costs in the country’s two biggest export regions—the Yangtze River Delta region near Shanghai and the Pearl River Delta around Hong Kong—ranged from $2.50 to $3 a mile compared to $1.75 in the United States. These costs reflect China’s profusion of local and provincial road fees as well as the country’s rising trans-Pacific shipping and customs costs.

To his credit, Muro goes on to note that the study failed to take into account other factors that would tip the cost advantage calculation in the US’ favor:

The upshot: The cost advantage of a Chinese Li-ion battery plant ranges from just 7 cents per unit to 25 cents per unit, compared to a U.S. site, depending on the production volume of the plant. And that leaves aside such other factors as increasing wage rates in China, quality deficits there, and the threat of unexpected supply chain disruptions, all of which would further argue for the cost superiority of a U.S. site. 

Muro’s conclusions are that this new data does not suggest that a full-blown manufacturing renaissance is near but that, at least in some sectors, the time may have come to reconsider the US-China cost dynamic. I agree with this position, and I know more than one executive with manufacturing capacity in China who has begun to draw up an exit plan. Interestingly, what the common element in these discussions about exiting China is risk. As I have written elsewhere, economic risk costs are those costs that are present but not yet accounted. For many companies, the cost of risk in China is getting too high. Add that reality to the narrowing gap in labor and other factors noted above, and it’s safe to predict that the wave of East to West manufacturing will continue to evolve in the West’s favor.

Read more: http://www.brookings.edu/blogs/the-avenue/posts/2013/06/03-cost-convergence-gap-china-us-manufacturing-muro?rssid=Blogs

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