Monday, September 8th, 2014 at 9:56 am by Wally
Over the last decade, I’ve worked in an industry that designed and actually made things – real products picked up and held by people, which can make their lives more comfortable.
And during the same time, much of the manufacture of those products, like so much else in this country, was shifted offshore.
The hard brutal truth in the move offshore was that by the time shipping costs and various taxes are taken into account, the offshoring of manufacture pretty much broke even. There is an exception: very high volume products which are highly labour intensive to manufacture will actually bring a one-time cost reduction when made in a country with lower labour costs.
But small to medium volume products don’t really give an actual improvement. Small to Medium means, in this context, volumes up to about 50,000 pieces / year. Below about 5000 pieces / year offshore makers generally won’t even be interested, and even at that low quantity the manufacture is usually done as a favour, as part of a deal where something in much more significant quantity is being made.
Although the offshore labour can be significant cheaper than making in Australia, the labour component of many modern electronic products is around 10% of the total cost of product manufacture. Result: if factory labour costs 1/2 as much in a foreign country, the resulting reduction in cost is about 5%.
In spite of membership of the World Trade Organisation, and the various mealy-mouthed platitudes uttered by pointy-headed economists, many of the foreign countries where products are now manufactured impose various charges – especially on foreign companies. Paying a bonus of 1 months pay is pretty normal. As is paying a county tax, a goods movement tax, a workers health care levy, the list goes on and on. These don’t figure in the headline labour rates (why ruin a good story?), and each is usually quite small – perhaps only 1% or so. But they add up and quickly reduce the benefit of the lower labour rate.
This all begs the question: How come stuff make in China / Vietnam / Malaysia / Cambodia / Thailand is so much cheaper?
The answer, as is often the case, is more complex than just “cheap labour” or the photos you occasionally see of Chinese factory sweat-shops.
In fact, modern foreign factories are frequently modern, with vast amounts of money and new technology thrown at them. Modern process flow-lines require a certain amount of investment – in planning, process worker training, infrastructure. None of this comes cheap.
Modern toolmaking in foreign countries uses the latest equipment for sintering, model-making, spark erosion, and so on. Again, none of this comes cheap.
Modern manufacturing relies on volumes, where economies of scale mean that profit margins can be cut and profit relies on high turnover. Economies of scale in turn mean that suppliers can be pressured to reduce prices or cut margins – again relying on high turnover.
The net effect of all these factors together means that offshore manufacture comes with a number of advantages:
- A lower labour rate reduces cost a little (and this is offset by taxes, charges, etc) making in many cases the labour component cost-neutral;
- Better productivity per worker can be achieved by eliminating batch-process style manufacture, and reducing work-in-progress (and thus having less capital tied up in partly made goods);
- But elimination of batch-process style manufacture requires significant investment in production facilities, equipment, training;
- Higher production rates achieve better pricing from suppliers;
- Investment in tools and technology allows faster production of tooling, at a lower cost (and where using the technology over and over means the investment can be paid off).
When many older Australian factories, set up through the 1950’s to 1980’s, are compared to a modern foreign factory, the difference is stark. The foreign factories are better designed, better lit, better planned, better resourced, and have more capital investment.
Where this really points is to a failure of Australian management, and Australian unions. Collectively they have signed the death-warrant for Australian manufacture. Their culpability comes down to simple factors:
- Excessive focus on short-term profits ($ today, ripped out, can’t be re-invested)
- Inability or unwillingness to try and get better prices from suppliers (Australia in global supply chains is seen as a bit of a back water, is frequently poorly serviced, and nobody wants to move on price);
- An unwillingness to spend on rejigging factories to use newer equipment (management don’t want to think or work hard, or try and justify a few million dollars of new investment);
- Unions who want to dig their heels in about work practices (seems they’d rather have their members out of a job than changing how they work);
- A frequent focus by management on “the bottom line” – that is, on costs. A better focus on the top line (sales, and growing them) is more work, but makes better profits that can be relied upon over longer periods.
THIS is why manufacture is going offshore: Mostly, its a failure of management.