For centuries the value placed on efficiency in American culture has led to a level of productivity unrivaled elsewhere in the world. Despite staggeringly low labor costs in various parts of the globe, exceptional productivity rates have allowed North America to remain a serious competitor in the manufacturing sector.
On a recent trip to the Far East, it was evident that a change in the low labor/low cost trend is occurring. Recently, labor costs in countries like China and South Korea have taken a steep turn upwards. China, in fact, has instituted a mandatory pay increase for all companies. These rising labor costs are eating away at their competitive advantage.
In the global manufacturing environment, the productivity efforts of the recent decades have driven the cost gap between goods manufactured in China and the United States down to less than a 10 percent differential. There was a point in the not so distant past that this difference was in excess of 25 percent. These productivity gains from the manufacturing sector have contributed heavily to leading the United States out of recession. Profits have been driven back into the coffers of organizations.
In conflict of these productivity gains is the fact that not a day goes by that politicians do not lobby for job creation and complain that corporations are sitting on cash that should be put to use creating jobs. Unfortunately or fortunately, however people choose to view it, these productivity gains are sustainable and will continue to lead to slower than expected job growth.
Corporations will free up their cash to drive growth, but it will not necessarily be for job creation; the contention is that it will be in technology and innovation.
During the time spent in Asia, it became readily apparent that Asian manufacturers are investing heavily in productivity improvement. The realization of dwindling labor cost advantage is manifesting in a real operational behavior change. Several of the manufacturers visited are “doing more with the same” or in some cases, “doing more with less.”
In order for North American manufacturers to take advantage of rising labor costs in Asia, they must consider investment in technology advancements while continuing to focus on productivity gains. These technology leaps will more readily close the existing gap much quicker than the incremental gains anticipated from productivity initiatives undertaken in parallel.
Harbour Results employs a standard assessment tool designed to benchmark companies’ performance across the entire value stream. The most recent trip taken included both manufacturers of injection molded components and moldmaking/tool builders. Several tool manufacturers were assessed in both China and South Korea. The resulting studies indicated that in most all cases the emphasis was on technology efforts to improve throughput, eliminate waste, and streamline systems.
An important point was that this initiative was not just relegated to the manufacturing disciplines. The front and back end of businesses, those surrounding the value-added processes, represent areas of opportunity that have not been addressed with automated systems and ERP systems introduced in recent years.
Supplementing productivity gains with innovation and technology is key to North America maintaining a global manufacturing presence in the future. Companies are well prepared for combining several steps in the value chain, building tools and manufacturing parts, but they also need to put a full-court press on this combined effort.
Leaders in industry must again think outside the box and allow for the practical application of next generation skills by fostering creative thinking throughout their organizations. The public sector is also critical in this process. North America has to be able to compete, and companies have to be able to invest in these technologies to be built to last and compete globally.