Sunday, March 02, 2008

The China Syndrome

The downward journey of the dollar is slowly but surely changing the competitive playing field for the United States and the rest of the world.

I recently was at a trade show and many of the manufacturers were reporting that their Chinese suppliers were looking for 10-20% price increases. With the steady decline of the dollar, the price of energy and freight is also rising. I once heard that the rule of thumb was that your product needed to have a 25% labor content for outsourcing to China to make sense. With increased freight costs and Chinese labor rates, that number must surely be much higher. The net effect of that change is that manufacturing in the US will increasingly be a more viable prospect, particularly for larger, more freight sensitive items. Look for a movement back to America for manufacturing in the coming years.

The other trend that will accelerate the return of US manufacturing is the concern and safety of Chinese products which have had dozens of issues in the news recently from lead painted toys to toxic pet food. Trader Joe's recently announced they are banning some imports from China to satisfy customers concern about quality.

It will be interesting to see how this plays out in the future. My money is on American ingenuity bringing back manufacturing to the US with production closer to markets (reducing freight burdens) and increased use of mechanization and robotics. It's a brave new world!