econscius

It Isn’t All Labor Costs… Shale Energy & Shipping Costs Impact Imports

In China, Job Creation, Mexico on February 26, 2012 at 7:23 pm

Two container ships pass in San Francisco Bay

Lots of factors enter into decisions about where companies manufacture.  Without question, a lot of US manufacturing has gone abroad, but not all; some may even be coming back due to cost equation changes.  Not everything goes to the country with the lowest wages (which would be in sub-Saharan Africa, not China, anyway) because of matters like productivity of the workforce, energy costs, shipping costs, the time for products to be received back to the US, local taxes, corruption, safety and rule-of-law in the other country, etc.

Mexico is actually gaining on China as a more attractive place to manufacture despite slightly higher wages, on account of the evolving cost equation.  An interesting piece in the Business section of the San Antonio Express-News gives some details why.

“Production workers in the U.S. make about $15 an hour, according to data from the U.S. Bureau of Labor Statistics. Industrial workers in Mexico make about $3.50 an hour, as opposed to $3 an hour in China, according to a report from the National Council of Maquiladora and Export Manufacturing Industry.”

“But the savings in labor are eroded with the higher cost of shipping from Southeast Asia. It costs $4,300 to ship a 40-foot container from Hong Kong to San Antonio via Long Beach, Calif., and will take 24 to 26 days to get there, according to DHL Global Forwarding. It costs $1,800 to drive a 40-foot trailer from Ciudad Juárez to San Antonio, and the trailer will get there in eight to 10 hours.” [1]

I often hear “$1 a day” bandied about as a wage in other countries, but as noted in the article, industrial workers in China earn about $3/hour and Mexican workers $3.50/hour.  That is certainly less than US norms, but probably higher than most people think.

Note the key driver of expense here:  shipping.  A standard forty-foot container costs $4,300 to get from Hong Kong to San Antonio, TX.  It still costs $1,800 for the same container to make it from the major Mexican manufacturing city of Juarez (across the Rio from El Paso) to San Antonio.  I point out time is valuable for manufacturers, too, so the more distant manufacturing is, the more of a hassle it is for extending the supply chain.  A container easily takes a month by ship from China to here.  Mexico is closer and local US manufacturing is closest of all.  It is no surprise a lot of manufacturing where time is critical (e.g. food processing) or very heavy, bulky items that won’t fit in a standard shipping container (e.g. making concrete or pre-manufactured housing) take place in the US because of the savings on time and shipping costs for heavy, bulky items.

The article continues:

“Manufacturing costs in China are about 94 percent of U.S. manufacturing costs, according to a 2009 report from consulting firm AlixPartners. In Mexico, manufacturing costs are only 75 percent of what they would be in the U.S., according to the report.” [1] [2]

China has become less attractive vis-a-vis Mexico because of a 20% appreciation in the Chinese Yuan, rising wages in China, and higher shipping costs, presumably reflecting higher fuel prices. [2]

Did I say rising wages?  Yes, another article in the Wall Street Journal also refers to rising wages in China because “the pool of Chinese workers is getting shallower.  China’s one-child policy and cultural preference for boys have led to a shrinking population of young people, particularly the women who work the floors of the apparel and electronic firms.” [3]  The WSJ continues, “labor costs are going up faster than productivity increases” in China.

This will have an impact on next door Mexico and even on the US as some companies look at the overall cost-benefit equation and decide to bring some operations home. [3]

El paso border station photo

Energy costs also matter.  There is very good news for American workers in the shale-gas boom states.  Another Wall Street Journal article points out how the rapid increase in low-cost natural gas from the shale drilling boom is cutting energy costs.  Shale states like West Virginia, Pennsylvania, and on the Gulf Coast are seeing interest from chemical companies opening brand new manufacturing plants to be near low-cost natural gas energy.  Shale gas now accounts for 1/3 of all natural gas in the US. [4]  “The US chemical industry is the biggest potential winner from the shale boom.” [4]

It is important to keep in mind that manufacturing siting locations are not exclusively about wages because energy costs, shipping costs, unionization, worker productivity, proximity to markets, corruption, safety and rule-of-law are all factors.  Some factors we can control (shale energy) are helping US manufacturing attractiveness while some other factors beyond our control (higher wages in China and higher global shipping costs) are also helping.

[1] http://www.mysanantonio.com/news/mexico/article/Despite-drug-war-trade-with-Mexico-is-booming-1360569.php   Note the article also speaks of the negative impact of drug war gang violence in Mexico.

 [2] The research the Express-News refers to is: http://www.alixpartners.com/EN/portals/0/pdf/AlixPartners%202009%20Manufacturing-Outsourcing%20Cost%20Index%20HIGHLIGHTS_2.pdf.  See page 13 for China and page 14 for Mexico.  Notice wages rose in each country between 2005-8.

[3] http://online.wsj.com/article/SB10001424052970204662204577201361904633428.html (behind paywall, get slightly more free on reprint at http://www.mexbiznews.com/chinas-export-pain-might-be-mexicos-gain).

[4] http://online.wsj.com/article/SB10001424052970204844504577100421253005122.html (behind paywall).

Pictures (container ships; Ciudad Juarez, Mexico; El-Paso/Juarez border crossing; natural gas drilling rig) from Wikipedia Commons.

 

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