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  • Offshoring Production to the USA

    Posted by David Foster on May 12th, 2008 (All posts by )

    Chinese entrepreneur Liu Keli, who runs a company making copper cylinders for printing presses, decided to open a factory in South Carolina. He was motivated by a desire to improve his position in the U.S. market, and was surprised to find that substantial cost savings were also possible on some important aspects of his business. Specifically: electricity costs are 75% cheaper, and continuity of service is much better. Mr Liu also got 7 acres of land near Spartanburg for one fourth of what it would have cost him in Dongguan, a city in southeast China where he operates three plants.

    Labor is, of course, significantly more expensive: about six times as much on a per-hour basis. But with the benefits from reduced power and land costs, and a $1500/employee tax credit from South Carolina, the overall cost picture is closer to that in China than he would have previously imagined.

    I’m also kind of surprised by these wide differences in land and electricity costs.

    (via Carpe Diem)

     

    7 Responses to “Offshoring Production to the USA”

    1. Shannon Love Says:

      I can see how land cost might be high in China.

      After all your talking about a place densely inhabited for the last 3000 years. Besides, land prices will depend heavily on the availability of transportation and power infrastructure both of which would be constrained.

      In short, you could buy land cheap enough but it would probably cost a lot to find a piece of land on which you could build a working factory might be relatively rare.

    2. Lexington Green Says:

      Compounding the issues Shannon mentioned, there is probably also a lot of political uncertainty to acquiring land for a business in China, with a need for bribery or bringing in unwanted “partners”, etc.

      The relative simplicity, transparency, finality and security of America’s land-title system is one of the under-appreciated foundations of our success, and indeed, of our world power.

      Jonathan R.T. Hughes is very good on this, as is Hernando de Soto.

    3. Shannon Love Says:

      Lex is right about the “overhead”.

      It’s probably like Mexico, where you either have to budget 20% for bribes or expect huge delays.

    4. Don Hodges Says:

      Wow – the opinion devolved rapidly from “surprise” to “Now I remember, developers and pols are sharks all over the world…”

      The vig is just a little more affordable in South Carolina USA, where you can see it all in the closing and “entitlement/permitting” docs.

    5. Ellen K Says:

      My husband works in telecommunications. Quite a few American companies and manufacturers are being purchased by European corporations as bargains. Unfortunately, the Europeans don’t understand that we haven’t got the type of cradle to grave healthcare and they try to hire folks for peanuts and few benefits. They also don’t understand that in this country, most corporate level sales operate on commission to the salemen. Without it, there’s no incentive to do anything because there’s no reward. The turnover in some sectors, most notably sales and manufacturing, has been steady and it’s growing. I am not sure what will happen as they continue to try to bleed profit from these companies by closing factories and consolidating workforces. When you lose your experienced professionals, then you are just like every other call center. It may be cheaper in the short run, but your business will fall apart in the long run. And with the dollar staying cheap, I think that’s going to be a trend that grows.

    6. mishu Says:

      China’s inflation rate has been steadily growing over the year and is now 8.5%. We’ll see more off shoring such as this as this trend will likely continue. It was only a matter of time that China would lose its comparative advantage.

    7. M. Simon Says:

      I am not sure what will happen as they continue to try to bleed profit from these companies by closing factories and consolidating workforces. When you lose your experienced professionals, then you are just like every other call center. It may be cheaper in the short run, but your business will fall apart in the long run. And with the dollar staying cheap, I think that’s going to be a trend that grows.

      I think it will continue in the vein of the “Japanese” invasion under similar circumstances:

      Sell high, buy low. i.e. the Japanese paid top dollar for American assets, couldn’t make a go of them and then sold them back at deep discounts. We have been running that con for several centuries. The marks never seem to wise up. It is a wonderment. BTW some Japanese figured out that you had to do cultural studies, just as you would in any foreign market, to understand how America operates and their auto companies are now prospering here. Watching movies and reading newspapers is not enough.

      BTW got a link from your blogger meet up with Eric. I’m one of his co-bloggers. Also a UC alum. As is my #2 son.