Are We To Blame?

By now regular readers know that costs are skyrocketing in China, and even the traditional accounting gurus are saying that outsourcing to that country is no longer the great deal it used to be.  Of course people with their heads in the real world, who understand the value of knowledge and experience and the risk of high-seas inventory, have known better for a long time.  Finally the mainstream media is beginning to learn the lesson as well.

As China makes big moves to break into the first world, U.S. companies that manufacture there face soaring costs in a region that used to be the home of cheap, outsourced production. Here’s why prices have jumped – and how 4 small companies are being crunched.

Let’s take a look at those four companies.

Melanie Corpstein CEO, Adorable Originals
Started manufacturing her line of dolls in 2003.
Cost increase in past five years: 20%

Beijing’s initiatives to curb pollution have resulted in the closure of many dirty factories, while remaining manufacturing plants face stricter environmental regulations. New, clean technologies, water management and recycling efforts aren’t cheap, and small-business owners who outsource to China see the changes are in their bottom lines. Corpstein’s Phoenix firm, which manufactures toys and clothing, has seen her profit margins for her line of dolls shrink since she began manufacturing them in China in 2003. "In this economy, it’s not a great time to raise prices," she says. "We are stuck between a rock and a hard place, and end up having to absorb the cost."

Too bad, so sad. 

Ted Hornbein Managing director of Asia operations, Richco
Replaced 20 employees with an $85,000 machine that must be replaced several times a year.

A tough new Chinese labor law went into effect on Jan. 1, requiring employers to offer employment contracts, a social security program and overtime pay. In addition, wages in China are rising by 10% to 15% annually. Those costs forced major staffing changes for Richco, a Chicago firm that manufactures plastic fasteners, wire management devices and circuit-board hardware.

Too bad, so sad.

Alden Mills Founder, Perfect Pushup
Moved manufacturing to China in 2004.
Cost increase since then: 20%-30%

While steel and iron prices have surged more than 30% since 2007, oil and natural gas prices have skyrocketed even higher, doubling in the past 18 months. Companies that manufacture in China now pay more for both the raw materials of their products and to transport the finished goods back to the U.S. In addition, the price of land on China’s east coast is also on the rise: Rents are climbing rapidly in Shanghai, Beijing, Guangzhou and Shenzhen.

Mills manufactures his Tiburon, Calif., company’s fitness equipment in two Guangdong province factories. Since moving his manufacturing overseas in 2004, Mills has seen costs jump. Perfect Pushup specializes in ergonomically correct workout-equipment handles made of metal and rubber; the rise in oil and steel prices has taken a direct toll on the company’s bottom line.

Too bad, so sad.

Jason and Rodney Carr Owners, Softline Home Fashions
Started manufacturing in China in 1998.
Cost increase in past five months: 18%-20%

Since 1985, tax rebates given to exporters have allowed Chinese products to be fiercely competitive on the international market. But over the past few years, and particularly in the past 12 months, Beijing has been axing rebates for thousands of goods across a wide variety of industries in an attempt to reduce China’s trade surplus. More than 2,800 goods had their tax rebates cut in 2007, with highly polluting products first on the chopping block.

Too bad,so sad.

Ok, ok, that’s a bit harsh.  Could they have known better? These are small business owners, without the financial and operations acumen to understand true value and true cost.  They were probably told, or read, that they must manufacture in China in order to be competitive.  If they were Fortune 500 companies then they should have known better… and some of those large companies are also learning a tough lesson these days.

But in reality perhaps we are to blame.  Yes, us.  The advantages of lean manufacturing are obvious to us.  We’ve lived it and experienced the power and magic.  It is a little counterintuitive and can play games with traditional accounting.  But is that an excuse?  Why haven’t we communicated the opportunity better?  The MEP’s do a good job at the regional level, or at least the best they can with their limited funding.  Organizations like AME, SME, and others put on some pretty incredible conferences.  But why is attendance only a couple thousand instead of tens of thousands?  There are great books, great training, and consultants on every corner.  Finding the knowledge to realize the benefits is easy, implementing takes some guts but with all the evidence the risk should seem small.

What more can we do?  Why isn’t a lean manufacturing transformation at the top of the list for every manufacturer?