There is more to Competitiveness than Low Labor Rates

As a sub-contract machining house we seem to be uniquely stuck between the two conflicting worlds of a customer base that expects pricing to fall over time and a supplier base and labor force that expect to be paid more.

To compete globally, our customers need to offer products at competitive rates. I know the use of the root word “compete” in the last sentence is redundant; but the simplicity of the need for competitiveness is sometimes lost when we consider only our local environment. Yes, labor rates, insurances, taxes, raw materials, cutting tools, and maintenance costs are all increasing, but the final customer base, those buying the tools, equipment, and goods our customers make, are continually looking for the best combination of price, quality, and availability, if not the absolute cheapest price. Our stores and distributors are stocked with alternative products produced in countries with significantly different economies and pricing advantages.

One often thinks of direct labor costs as the most obvious pricing advantage. Here in the US, we tend to associate low prices and low wages with China. I have images of twenty-eight cents an hour employees seared into to my brain from very outdated articles. Ten years ago the manufacturing wages in China were already averaging over $2000 a year. According to the Trading Economics web-site, that amount has steadily increased to a current average manufacturing salary of 46,431 Yuan or $7430 per year. These wages are still significantly lower than US figures, but already three times higher than that of India, who ranks fourth in a study of global competitiveness by Deloitte; behind China, Germany, and the US .

On the other hand, Germany, whose competitiveness is ranked above the US has an average labor cost that is even 31% higher than that of the US.

The Deloitte study clearly shows there is more to overall competitiveness that labor rates alone. Productivity is a major component to the equation. The US enjoys the highest productivity rate out of the top ten most competitive nations, with a rate that is 4.8 times that of China (Deloitte 2013). We also score high on the “innovation index.”

At Belrick Corp, our productivity is accentuated by the experience and ingenuity of our employees, as well as our business partners. Tooling suppliers are improving and refining their cutting tools to increase productivity. So even though tooling costs may be increasing, the rate of metal removal or the volume of metal a tool will cut before needing to be replaced has increased, leading to increased productivity. Belrick has run trials of newly developed inserts and drills from our tooling suppliers. Sometimes the results are mediocre, but occasionally the new product is a technological breakthrough. For example: last year we tested a new carbide drill style that reduced drilling time, while dramatically increasing tooling life in stainless steels.

In addition to tooling, CNC machines are becoming more productive with each generation. Belrick tries to reinvests in newer, more efficient equipment on a regular basis. Our new equipment choices, however, remain within the sphere of our core competencies. We have found it more economical to partner with other firms that are better suited for some unique operations than to invest in systems that would be under-utilized.

Raw material quality is also an important element in the equation. For example: the cost to machine a casting is greatly dependent on the quality of the castings; effecting scrap rate, tooling costs, productivity, and product integrity. Often, when all factors are properly evaluated, the overall cost of a quality castings is less than that of using the cheapest available product. Of course, a company’s mere presence in the US does not guarantee superior quality; but we have been able to develop relationships with a few US foundries that offer quality castings at competitive pricing. The combination of pricing and quality has allowed us to offer complete domestically made products at pricing below the original imported part cost.

As I was preparing this letter, one of our employees stopped me at the end of the day to boast that he had successfully figured out how to configure twenty-one different unique tools in our twin spindle turning center with live milling without interfering with each other. This endeavor demanded ingenuity. He was able to develop tool blocks and alter tooling so everything could fit. His parts will now be run complete, in one operation, assuring concentricity and reducing handling. My response to him: “Ingenuity does trump low wages.”

Although other articles have highlighted the downward trend in overall family income over the past 7 years, according to the bureau of labor and statistics, salaries in the manufacturing sector have increased by 18%. In addition, the cost of benefits has increased 21.7%, the most notable of which is the 27.3% increase in health-care insurance. State unemployment insurance premiums have also increased an average of 42.8% over the same period which you can see on pages 165-168 here. This is a modest increase when compared to inflation in China; where wages have increased 258% over the same time period.

Still new threats to our competitiveness are gaining momentum. The international business executives surveyed by Deloitte expect both India and Brazil to surpass our level of competitiveness in the next five years (Deloitte 2013). In order to survive in a changing marketplace, we need to strive for continuous improvement. It is our innovation, ingenuity, and work ethic that helps the US to remain competitive despite significantly higher labor costs. We will need to further stretch these advantages if we want to retain our leadership as other markets develop their competitive advantages.