Oil Price and Wage Hikes Changing Offshoring Equation
McKinsey has weighed in on the topic of how higher oil prices and wages are eroding the manufacturing advantages of Asian nations.
As Research Recap reported in May, CIBC World Markets estimates that in 2000, when oil prices were near $20 a barrel, the costs embedded in shipping were equivalent to a 3% tariff on imports. Today, that figure is 11% — meaning that the cost of shipping a standard 40-foot container has tripled since 2000.
McKinsey says this not only affects exports from Asia but also sharply increases the price its manufacturers pay for raw materials. It now costs about $100 to ship a ton of iron from Brazil to China — more than the cost of the mineral itself. Wage inflation, coupled with a weaker dollar, adds to the challenge: in dollar terms, annual wage inflation in China has averaged 19 percent since 2003 , McKinsey notes.
An average production worker, paid $1,740 a year in 2003, makes $4,140 today. By contrast, wage inflation in the United States has averaged only 3 percent. The wage differential between Mexico and China has also narrowed significantly. In 2003, Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15 times. Combined, these trends are reshaping the competitive landscape for offshore manufacturing in a number of locales.
Products that were once profitably made in areas where the local costs are lowest are therefore moving into the near-shoring zone or in some cases may now be suitable for production in the United States.
A midrange server, for example, made profitably in China three years ago, has slipped below the breakeven line because of higher wages and freight costs. The server now could be produced more economically at a plant closer to consumers (in Mexico, for example, where the mix of logistics and labor costs is more favorable).
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