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Shattering the 'Made in China' default

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By Catherine Beard

It seems there is a season to everything, including – for some industries – the offshoring of manufacturing to China.

It’s a shift that’s coming to light in larger markets such as the US, but also in New Zealand.

The Boston Consulting Group’s (BCG) report Made in America, Again: Why Manufacturing Will Return to the U.S. predicts that within five years, rising Chinese wages, higher U.S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U.S. and China for many goods consumed in North America.

The report deduces that China should no longer be treated as the “default location” for cheap factories. Instead, companies should undertake a fresh, rigorous, product-by-product analysis of their global supply networks that takes into account the total cost of making a product – labour just being part of it. Other factors include transit costs, time-to-market, logistical risks, worker productivity, energy costs and other expenses depending on the scenario.

Here in New Zealand, firms are proving that they can provide better options than China for some types of manufacturing.

Sheet metal firm Metco Engineering is going from strength to strength making componentry for a whole range of customers, from Swedish lock manufacturer giant Assa Abloy to US defence giant Lockheed Martin.

Metco saw off competition from China when Assa Abloy signalled it may have to move its window stay manufacturing to its operations there. By doing a cost comparison, pricing against Assa Abloy’s own factory in China, Metco ended up sourcing stainless steel from Taiwan and buying material at the same cost as the Chinese, so they were able to compete.

Metco Director Paul Jessup says low overheads and a small number of admin staff is key to keeping their costs down. Also important is R&D, constantly keeping ahead of the competition, so their customers can do the same.

“We’re constantly developing our customers’ products and trying to improve the efficiency and quality of materials to keep the costs of their products down so they can be competitive.

“If they’re competitive that keeps us in business as well as them. That’s key to manufacturing in New Zealand, having good partnerships between suppliers and customers.”

So there are opportunities and niches to be claimed by smart Kiwi manufacturers with a competitive, think-outside-the-box outlook.

Another Kiwi company demonstrating what can be achieved in New Zealand is Pertronic Industries, which manufactures automatic fire alarm control equipment for industrial and commercial buildings in a number of countries – including China, Australia, South East Asia and the South Pacific.

In China, Pertronic is successfully competing against multinational giants such as Siemens, yet all of its design, development and manufacturing are carried out at its factory in Lower Hutt, Wellington.

David Percy, who founded Pertronic, says what helps them to lead in a niche market is high quality and an unrelenting focus on R&D to keep them ahead of the competition – just like Metco.

There are of course some products and industries that will always (at least in the foreseeable future) be better suited to being manufactured in China.

According to the BCG, looking towards the future we can expect manufactured goods to fit one of three different groups when it comes to where they are made.

Those products of more modest volumes, where labour accounts for a small proportion of total costs such as auto parts and appliances, will be up for re-evaluation. Those products that require a high labour content and are produced in high volume are likely to remain in China. Finally, companies that make mass-produced labour-intensive products, like apparel and shoes, may move production from China to other low cost nations.

This is not to suggest that Chinese manufacturing will decline. Chinese production will continue to increase to meet the country’s enormous domestic market which is growing by millions of new middle-class households each year, as well as other growing Asian economies. It will also continue to be a low-cost supplier to Western Europe.

The BCG study concludes that while a US manufacturing resurgence will not diminish China’s role as a global manufacturing power, it will provide more manufacturing and sourcing choices in certain areas.

It’s in these areas where the opportunities lie for Kiwi manufacturers, as is being proven by the likes of Metco and Pertronic.

Read the BCG report here.