U.S. Manufacturing Slides in Cost-Competitiveness

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The U.S. manufacturing industry slipped from fifth place to eighth in global cost-competitiveness, according to a new ranking from business advisory firm AlixPartners PPL.
Mexico held onto the lead spot as the lowest-cost country for outsourcing production for U.S.-based companies. China slipped from fourth to sixth place, although it improved over last year's study in many aspects, AlixPartners said. India and Vietnam retained their second and third positions, respectively.
The study appears to disprove a growing perception that increased transportation, labor, and shipping costs were rendering offshoring disadvantageous and spurring a return to manufacturing on home turf. Such media reports, in fact, sparked AlixPartners' interest as it set out to examine the cost/benefit of outsourcing manufacturing from the United States to key low-cost countries, according to the report.
Though the United States became more cost-competitive in the year-earlier study, it gave back those gains and slipped to 2005-2007 levels, due in part to the dollar's uptick and a rapid decline in logistics costs. All major LCCs gained on the United States in 2009, according to the report.
"There is no doubt that economic forces worked against U.S. manufacturers this past year," said Stephen Maurer, a managing director at AlixPartners and a leader of the firm's Manufacturing Improvements practice, in a statement. "This study shows that despite recent improvements in U.S. productivity, hungry global competitors have become even more formidable, both as outsourcing destinations and as competitors to U.S. companies."
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Looking ahead to 2010, AlixPartners anticipates that the dollar will weaken significantly and transportation costs will stabilize at 2006-2007 levels, with oil prices leveling off at roughly $80 per barrel. The firm expects raw material costs to remain low due to a weak global recovery, but also anticipates growing inflation in local wages in developing countries, especially China. The firm also singled out punitive tariffs as a "wild card, particularly in China."
The recession forced U.S. manufacturers to cut costs and monitor spending, and many companies went to the next level with lean and Six Sigma initiatives to enable them to work smarter, Maurer said in an interview today. But they need to "go to the next level of work on their cost structures," he said.
"U.S. companies need to step up their game. Low-cost competition is not going to go away," he told MA today. "Companies can't be high-cost and mediocre; they have to be high-cost and outperform the competition."
For example, companies are reviewing product and customer profitability, trimming money losers, refreshing their make-buy analysis, and examining their footprint to be sure they have the correct number of plants in the right locations to reduce fixed costs and rightsize their operations for the business, he said.
"In the past, you could be relatively comfortable that the manufacturing strategy decisions you made today would still be valid two or three years from now. That's not necessarily the case any more. Today's reality calls for constant vigilance and flexible strategies to ensure that companies stay ahead of global changes, rather than fall victim to them," Maurer said in the statement.