Mitch Free is the CEO of MFG.com, an online marketplace for the manufacturing industry. Because of his extensive travel and business with suppliers, manufacturers and importers, Free is in a unique position to monitor manufacturing companies all over the world.
One of the biggest economic concerns in the last few months has been the notion that China is losing steam as an economic powerhouse, toppling a fragile world economy. “Not likely,” said Free during a recent interview. “China is going to be the powerhouse for a long time. While there will always be another lower cost country that can do the labor for less, there is not another China on the horizon.”
Free said that while Chinese companies are now outsourcing to Vietnam because of the cheap labor, the infrastructure is not there to make that country a contender for China’s position. China has a more educated workforce with many technological advantages as well, but it goes beyond that.
China Doesn’t Play Fair
“The fact is, China doesn’t really play fair,” said Free. “The economy is absolutely controlled by a government that can just make decisions and have things done exactly as it wants, when it wants. Last Friday, they lowered the interest rate in China and gave the banks more authority to negotiate interest on loans and a bit of leeway who they could loan to. They also increased subsidies for oil and gas to drive down the price. They just changed their economy in days. It’s hard for any other country to compete with that.”
Free cited that as one of the challenges the U.S. has in competing with China. We are trying to compete with what we consider a fair and democratic system. “But,” Free says, “There is according to the leadership in China a good reason for them doing things the way they do. Firstly, it’s a huge country, with 500 million people starving, in terrible poverty. Sure, the growth in the last decades has put 800 million people to work, but they still have a long way to go. They don’t care to play fair.”
Tactics for keeping population growth under control is something China has been criticized for, but leadership and much of the population there understands that it is necessary to insure that those who do already live there will have jobs and food. However, that is not the case in India, and that is one of the reasons, according to Free, that India will not be the next China.
“India is a mess,” he said. “It will never catch up. Sure there is cheap labor, but the population growth is crazy. Infrastructure is a mess. They have a lot of systemic problems, and the way India is organized, there is a central government but the different states in the country are run with different laws, state to state. It’s like herding cats to try to get anything done in an organized way.”
While there does not seem to be any one country that can, at least in the near future, take over from China, there are changes in technology that is working to spread the manufacturing over several markets.
Digitally Driven Market Change
“Another China is not practical. There are huge differences in the way things are sourced now. Everything is digital in manufacturing,” Free said. “Much of the art has gone from manufacturing; now it is technologically driven. We’re starting to think about manufacturing and factory capacity like printers on a network. It is very repeatable. A CAD file is what drives the C&C machines, the milling machines and the lathes that produce the parts. You can take the file, a 3D design, send it to anyone who has the machines, put that into the C&C machine and the part can be made exactly the same anywhere in the world.”
Besides making it possible to have manufacturing closer to market, this also mitigates risk. If manufacturing is spread out over several areas, natural disasters like the earthquake in Japan do not have such a huge impact on supply. That also means that, while the cost may go up because a buyer is getting only 100,000 parts from each of several places instead of 1 million parts from one place, transporting them will be faster because they can be built closer to market.
“Another trend is our desire for customization,” said Free. “If you build a million of something, the price to the customer is lower, because it’s commodity. But when the company allows businesses or consumers to customize the product, you can charge a nice premium. That does not lend itself well to manufacturing on the other side of the world. You need to be close to where the consumer of that good is, and it’s possible you could have a manufactured core component – the rest is done at the end.”
A Global Spread
All of these factors are going to prevent the concentration of manufacturing happening in any one place like it did in China. But it does mean that other countries will be able to reap the benefits of distributed manufacturing. Morocco, Tunisia and Algeria have huge unskilled workforces where labor-intensive work can be done.
“And Mexico is benefitting,” said Free. “There is a trend toward Mexico. Party because it is closer. It’s easier for U.S. companies to react to changes in the marketplace, and it’s far less expensive to get the product here. It’s a good cash management strategy as well. If you are ordering a million widgets a year from China, it takes 6 to 7 weeks to get them here on the boat. If you can produce them in Mexico and can get them in a week, you’ve just got yourself 5 weeks of cash. And, because you don’t have to commit to a million, you don’t have the risk that demand will go away before you get the products.”
Free sees several other countries with the potential to grow as manufacturing nations as well, including Thailand and especially Indonesia, which is a very poor, highly populated country that is building infrastructure and getting itself well educated.
“Columbia, there’s a lot of interest there as well,” he said. “It has some great educational institutions and good engineering talent. Labor is really cheap. That country was so embattled with the drug wars and everything they’ve been through, it took a huge toll on the people and the country and they are investing in awareness and encouraging entrepreneurs. If they can get wired to the global market, Columbia will be a good place to look.”
While manufacturing is indeed spreading out around the globe, there is no one country poised to take China’s place. The challenge for domestic companies is to take advantage of this new supply chain model to become more profitable in the new world economy.