Is Outsourcing to China a Mistake?

This story about an entrepreneur who has a plant in Mexico (where labor is much more expensive than in China) and questions moving it to China. He makes some very interesting points.

There are a lot of counterarguments to using more labor in China. You're talking 1.5% of our costs in Mexico. Move it to China, and you could cut it to 0.5%. So you have a 1% margin at stake. But there are countervailing factors.

You've got airfreight, which can be very pricey. Our plant is less than an hour away from major domestic shipping facilities in the San Diego area, and we can get everything out on a truck. The proximity also helps us keep cycle times low, so we can make sure we get our products on store shelves. The big stores want less and less of a window between when they give an order and when it appears on their shelves.

Then you've got product-defect rates. Even though we use a lot of the same production procedures where we produce in China, in Mexico we have a higher level of quality. We have employees who have worked for us for 35 years, since we opened the plant. We have very low turnover. We have a very knowledgeable group that can produce exceptional quality. That's hard to replicate elsewhere.

Exactly. Sometimes it is necessary to move because the cost advantages are overwhelming. But, I wonder how often companies do it without looking at the total cost. You would think a thorough analysis of such a decision would be performed, unless you have ever worked in management. Then you know that if outsourcing to China is a fad that sends the stock price up on announcement, everyone may want to do it. Or if one of the top managers supports it, no one may challenge him for fear of limiting future career moves.

Companies are demanding more just-in-time capabilities from their suppliers all the time. If your customers are in the U.S., I think it is difficult to provide that kind of short turn around if you manufacture in China. Manufacturing world-wide is declining, but I think North America still has some competitive advantages in this field. I guess that is why I don't worry about this as much as other people. I think in the long run our economy will be fine.