China Production Advantage Erodes as US, Mexico Gain

The cost advantage of manufacturing products in low-cost manufacturing locations in Asia will erode in comparison to the U.S. and Mexico in 2012, according to a new report by global consultancy AlixPartners.

China, which is experiencing negative pressure as an exporter because of wage inflation, exchange-rate pressures and higher freight rates, could lose its cost advantage vis-à-vis U.S. production in four years if freight rates rise at 5 percent annually, according to the 2011 U.S. Manufacturing-Outsourcing Cost Index.

Products produced in Mexico had the lowest landed costs for U.S. importers in 2011, while other key low-cost countries, including India, Vietnam, and Russia, had higher landed costs than Mexico for exports to the U.S., but remained more competitive than China.

While the U.S. regained some cost advantage relative to the major low-cost countries in 2011 due largely to the weak dollar, AlixPartners said the major LCCs maintained a cost advantage over U.S. domestic suppliers, with savings potential similar to that seen in 2005-2006.

Since 2007, Mexico, some locations in Europe and locations in Asia other than China have gained a competitive advantage for offshore manufacturing.  In addition to Mexico, emerging LCCs, including India, Vietnam, Russia and Romania, had lower landed cost for their exports to the U.S.

While China may not lose its cost advantages over the U.S., the report says U.S. manufacturers could face challenges if they continue to rely on China for their supply base and don’t adopt a flexible sourcing strategy.

Source: Journal of Commerce