For the last two decades, China has been an economic powerhouse, rising to the second-largest economy in the world. That success has raised the standard of living for Chinese workers, who’ve proven to be skilled, efficient, and reliable. So, naturally, the cost of Chinese labor has started to increase and has reached the point where some analysts no longer consider China a “low labor cost” country. Companies who have been outsourcing to China with good results are starting to wonder if labor costs, along with other considerations, now outweigh the benefit. At Genimex, we believe that China remains a cost-effective destination for companies demanding quality manufacturing. But we also understand the benefits of diversifying a company’s supply chain. In this article, we present some thoughts on the current cost of labor worldwide and some other factors to consider when choosing an outsourcing country.
The Reshoring Institute, which as its name suggests is a think tank dedicated to encouraging companies to bring manufacturing back to the United States, recently released a report on labor costs in 13 countries. RI found that the highest average salaries for production workers and machine operators were found in the following countries:
- Germany — $33K
- United States — $32.5K
- United Kingdom — $31 K
- Spain — $23.5K
- Cech Republic — $20.5K
- France — $20K
- China — $13K
- Brazil — $12.7K
- Thailand — $8K
- Malaysia — $7.5K
- Vietnam — $6.5K
- Mexico — $3K
- India — $2.5K
There are several takeaways from this summary that companies must consider. First, Chinese labor is still significantly less expensive than the Western workforces surveyed. Second, comparing the hourly wages for two groups of workers is not always an apples-to-apples process. Higher-paid workers may have greater skill and efficiency and be able to produce more products each hour, so the labor cost per product disparity is not as great.
Chinese workers are regarded as highly skilled and efficient, and many operate within state-of-the-art facilities. These benefits weigh heavily in China’s favor. Another point in China’s favor is the sheer number of workers in the world’s most populated country. In Western Europe and the United States, worker shortages not only inflate wages but also cause service delays.
But companies choosing to outsource must also factor in ancillary expenses that could affect their per unit cost. These include logistics, raw materials, energy, proximity to the market, and import duties. In some of these areas, China does not score as well as Mexico. For example, the Trump-era tariffs still affect many items coming from China, such as those made with steel and aluminum. And even though China’s port system is quite efficient, products must still be shipped across the Pacific Ocean to reach U.S. ports, which have struggled to off-load shipments, causing additional delays. By contrast, Mexico operates under the friendly terms of the United States-Mexico-Canada Agreement. The proximity of Mexico to the United States makes manufacturing there extremely advantageous.
But while Mexico is becoming an attractive option, brands can also benefit from low-cost labor in the ASEAN states, such as Thailand, Malaysia, and Vietnam. Analysts predict that the ASEAN region is poised for explosive post-pandemic growth, which could make the region the world’s fourth-largest economy. The reasons for this favorable outlook include:
- Regional Comprehensive Economic Partnership — Hailed as the world’s largest regional free-trade agreement, RCEP aims to boost foreign direct investment related to the digital economy. Signatory states include Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand, and Vietnam. This membership accounts for 30 percent of the global GDP and more than one-quarter of the global trade in goods and services.
- Facilitating the Fourth Industrial Revolution — Recent ASEAN Summits have focused on planning for the sweeping digital transformation of the region, utilizing private investment in digital infrastructure to develop a range of capabilities that include 5G networks, cloud computing, cybersecurity, artificial intelligence, and smart manufacturing.
- Public-private cooperation — The region’s governments understand they must play a role in incentivizing investment and directing sustainable development that balances growth with environmental stewardship.
In many ways, the ASEAN region has the opportunity to become the Next China, building a vital economic engine, while avoiding many of China’s mistakes, which include high rates of pollution and its negative impact on the quality of life for the Chinese people.
Choosing where to outsource is a complex process, where labor costs are only one of many factors. Seeing the big picture and appreciating all its parts is difficult and requires guidance from experienced professionals. Genimex can help you explore the full range of possibilities open to you.