Global Manufacturing Costs

What precisely makes manufacturing parts overseas more attractive? I hear a lot about labor cost, but as I research more, I hear about subsidized raw materials like steel, or subsidized electricity, public land giveaways, etc.

What are the percentages in terms of cost, on average, for making general metal parts like those for automotives? How much is labor cost? How much is energy cost? How much is material cost?

Could US plants compete by using solar panels w batteries? I saw another thread on here about solar powered machines. How about building your own CNC - I see do-it-yourself CNC build projects online. I also have seen videos of people that made small foundries in their backyard, as well as micro mini mills being much more cost-effective than blast furnaces - how about buying scrap cheap and then making your own materials? Or renting machine time on CNC's somewhere instead of the upfront cost of buying machine tools?

I guess my question is how exactly is it that domestic manufacturing operations cannot compete? It seems like there is much more to it than simply labor, and the possibilities of streamlining/automation can change the numbers completely; like self-checkout lines in Wal-Mart vs cashiers

Decades ago, we learned it wasn't direct manufacturing and assembly costs that drove costs. Back then, touch labor was only about 5% of something like vehicle cost. So, even if we get self-checkout factory floors in large manufacturing facilities (auto, consumer electronics, appliances, etc.), that doesn't restore the balance.

Personally, I think one of the main reasons we're losing some of our competitive edge is because of the "financialization" of our industries. Investors want Goldman-Saks-like returns and will only provide capital to companies that promise, say an Enron. Never mind that those kinds of companies go boom and bust -- because we reward the boom makers on the way up and have taxpayers in general foot the bill on the way down.

Too many CEO's manage for short term returns.

Too many really smart kids want a Harvard MBA and a job on Wall St.. There, they invent clever ways to skim money from the top, rather than clever products and services. There are exceptions to this, of course, such as the kids aspiring to high tech careers. But by and large we've gutting the desire to make great products for customers and replaced it with an "Apprentice" ethic. Cheat, lie, steal . . . whatever it takes to "win."

On a more optimistic note, technology can give small companies a nearer-level playing field. Could be we'll see a resurgence of smaller, better focused manufacturing companies in more niches. That gets to be a bit more difficult, though, if you have to go to the usual suspects for significant financing and you're outside the venture capital sweet spot of the year (social media? pharma? etc.).

PeteM said:

Decades ago, we learned it wasn't direct manufacturing and assembly costs that drove costs. Back then, touch labor was only about 5% of something like vehicle cost. So, even if we get self-checkout factory floors in large manufacturing facilities (auto, consumer electronics, appliances, etc.), that doesn't restore the balance.

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So why is it that many machine shops across the country do not simply make those parts? I talked to one guy who said he was selling a part for 12 bucks, and his customer cut him and started getting it from Korea. He cut it to 6, but they said they were getting it for 3.50, but there was no way he could do that. He said it was raw materials.

I guess my thing is, I see nowhere percentage costs mentioned, and I'm really interested to see that, along with if you could cut down on those costs in those ways I mentioned originally.

nyc123 said:

So why is it that many machine shops across the country do not simply make those parts? I talked to one guy who said he was selling a part for 12 bucks, and his customer cut him and started getting it from Korea. He cut it to 6, but they said they were getting it for 3.50, but there was no way he could do that. He said it was raw materials.

I guess my thing is, I see nowhere percentage costs mentioned, and I'm really interested to see that, along with if you could cut down on those costs in those ways I mentioned originally.

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There is the issue of currency exchange rates and manipulation.

One thing that hurts the US in one way is that our currency tends to maintain a higher value than our global competitors. This makes imports cheap and exports expensive. Part of this is caused by the US being a reserve currency and that the price of crude oil is in US dollars.

I do not like tariffs but you also need to have a level playing field with the competition. The level playing field contains a lot of issues such as environmental regulations, corporate tax rates,transportation costs, exporting nations attitude to long term market dominance, etc. that get buried in the discussion.

Many of our competitors have a very long view of their market goals while the US tends to view things in very short time periods such as quarterly. The Chinese have been very wise in their approach to control and development of market material streams. They own the mine, the mining equipment,transportation of raw materials, refining-manufacturing facilities and equipment, and transportation of finished goods to market. They can take a very small profit margin or even a loss in certain areas and still make a profit with the total supply chain.

There is also the issue of standard of living and social safety-net-welfare system. Our competitors often take a make work approach to employing their citizenry while we tend to throw money from taxed profits at the problem. Our approach does not tend to put people back into employment but keep them out of the job market making them a type of overhead cost. The competitors do not share these same values and view their populations as a raw resource to be utilized.

nyc123 said:

So why is it that many machine shops across the country do not simply make those parts? I talked to one guy who said he was selling a part for 12 bucks, and his customer cut him and started getting it from Korea. He cut it to 6, but they said they were getting it for 3.50, but there was no way he could do that. He said it was raw materials . . .
.

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I won't pretend to know all the reasons why the guy you were talking to couldn't meet the Chinese price. But let me address just the material price. Lots of stuff small shops make is machined from aluminum. The aluminum itself may be well over half the finished cost, as volumes increase. So, what's different about aluminum sourced from the US and sourced from China?

China's government financed over-expansion of aluminum capacity (basically bearing the investment costs) and then supported dumping of it to retain world share. Not entirely different than what we do with some agricultural products, but in the manufacturing realm. In any case, those policies would make it cheaper to produce stuff from Chinese billet. This is a biased (protectionist) source, but it provides some insight:

Record Aluminum Overcapacity and Exports from China Continue Despite Section 232 Aluminum Tariffs | The Aluminum Association

The US, far as I know, doesn't really have an aluminum production policy. But we do have Goldman Sachs (note this after their 2006=2008 screwing of customers), which found a way to raise costs for US aluminum users, pocket the profits, and provide an actually negative service for its customers. That might make it a bit harder to compete:

Senate panel accuses Goldman Sachs of manipulating metal

'Immoral, but not illegal': metal warehousing games in the spotlight - Reuters

As another example, aluminum production is extremely energy intensive. Thanks to natural gas, the US now has a surplus of energy that could be used to provide cheaper electric power. However, apparently our number one capital investments in recent years have been in creating facilities to liquefy our natural gas and sell it to competitors overseas:

The Case for U.S. Liquefied Natural Gas Exports

Now, most financial commentators think this is a wonderful idea. There's an argument to be made about market efficiencies, but I'm not entirely persuaded. Should we also be selling our water to the Germans, our topsoil to Brazil, and our clean air to Shanghai or New Delhi?

You can probably find past threads here with other difficulties shops here have had with just aluminum - crappy quality leading to rejects and added costs, distributors raising prices on the hint of a trade war, shortages, and actual trade war.

My point -- and it's a generalization -- is that we let self-serving (rather than customer-serving) financial interests run our factories (all sorts of financing, buy-out, tax hedge, energy, even aluminum warehousing games). It eventually affects even smaller companies.

PeteM said:

My point -- and it's a generalization -- is that we let self-serving (rather than customer-serving) financial interests run our factories (all sorts of financing, buy-out, tax hedge, energy, even aluminum warehousing games). It eventually affects even smaller companies.

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This is what I'm trying to figure out. It seems the more I look into this, the usual causes seem wildly overblown. Labor isn't always such an insane cost, and if it were "automation", then why are those jobs overseas and us importing? I.e. if it's automated, then theoretically, the cost of the machines would be the same in either place, and those machines would be running in the US to minimize logistical costs/time and quality, etc.

What I'd really like to see is if it's possible to make things in the US, such as auto parts, that are currently imported a lot from China, and if so, how such a setup would possibly/theoretically be made to do so. It seems like the costs/competitiveness come down to a lot of those things you mentioned. One thing I researched a while back was the process for making glass beads and why we import the overwhelming majority of them. I got in contact with a US manufacturer that makes beads, and they said the main market share is for beads used in sandblasting, and the environmental regulations and OSHA standards had far more to do with it than anything else. They said that, in China, they can use arsenic, for example, in the production process, and the lead content requirements for the end product under US law are very low, while there are no such requirements in China. The loophole in that law is to simply import the beads and not produce them. Another thing much like you mentioned is companies focusing on distribution and freeing up large amounts of capital invested in plants/equipment. Instead of holding all that on a balance sheet, as well as handling managing a plant, why not outsource it to a company overseas and simply focus on distribution? Pay the money back to shareholders

all of the above mentioned factors apply.

But a big thing today is that a lot of modern products are very complex, and require very expensive specialized processes to make. Old time cars were mostly metal. New ones contain much more plastic parts, much less big hunks of machined steel.

A lot of industries require groupings of related factories to exist.

When BMW opened in Spartanburg, the dragged along 400 other companies and/or plants to supply them, and 60,000 plus employees at all of them.
You cant just open one plant, and expect to be comptetive, in many industries, if you dont have easy access to local platers, polishers, heat treaters, powder coaters, and many other suppliers- and, in this day and age, these all need to be relatively expensive plants.

For instance, decades ago, I used to work in the loudspeaker industry, and all of our suppliers were in the Chicago area. We had multiple stamping houses, each of whom had various platers and tool and die shops they worked with. There were factories that made nothing but electronic connectors, rivet factories, wire winding shops, manufacturers of cloth spiders that were basically woven material heat formed while wet into precision molds, magnet manufacturers, speaker cone factories for both paper and plastic cones, as well as subs who made cast rubber surrounds, or die cut felted ones. Then there were shops that supported all those industries- glue suppliers who bought specialized glues by the rail car, repackaged them into 5 gallon drums, all kinds of toolmakers with decades of very specialized experience.
Pretty much all of these were 50 to 80 year old companies with centuries of accumulated employee knowledge, and shops full of specialized tooling.
And it required ALL of them to make one 12" woofer.

They are all gone now. The whole industry moved lock stock and barrel to China, where, again, its mostly in a few small clusters, with family owned shops who have now worked together for decades.

Yes, theoretically you could have a US stamping shop make you dies from scratch and stamp you custom speaker baskets for your new design. But it would cost a fortune, compared to a chinese shop that does this by the tens of thousands a week. And we have, for legal and environmental reasons, a scarcity of local, quick turnaround, plating shops that will barrel plate hundreds of these a day yellow zinc chromate.

Once you lose the entire ecosystem, no single shop, no matter how competent, can compete on price, or quality, for single parts.

Apple, for example, has multiyear contracts to buy the entire global production of things like the glass for their screens. At one point, Foxconn, who was milling those phone bodies from aluminum, was buying a thousand small VMCs a year to do it- so even if you wanted to, and could afford to, buy matching equipment, it might take you a year to get it.

Small (5- 50 employee) CNC machine shops in the USA are very nimble, and can, relatively expensively, make a lot of cool stuff- but they cant hope to compete on something like parts for a one dollar cigarette lighter that you buy at the 7-11 counter. But there is an entire very large city in China where there are hundreds of factories who make, in gigantic quantities and very cheaply, every part for a lighter. Guys who have made so many multi part injection molds for football helmet shaped lighters that they can knock em out for peanuts. And do.
Could a US mold shop make one of these- sure- but not for the cost that the chinese do, and we are still 8000 miles from the factories that make all the other parts.

I have friends who make glass beads in the USA- and they sell em for ten bucks a bead. To match the chinese prices is not only the environmental laws, but the mass production, the ease and low cost of all supplies, the lower wages, and the whole manufacturing infrastructure. Specialized cardboard boxes or packaging there is quick and cheap- here, its slow and expensive. Shipping there is cheap, subsidized by the chinese government. Here, its expensive.
Our government (the post office) actually subsidizes chinese manufacturers to drop ship direct to the USA.
But if I want to ship Fed Ex 500 miles, it will cost me ten or twenty times as much as for them to ship me something from China.

Ries usually can really give a detailed in depth rundown of such things very well.

Sometimes also the mere fact that investment has been heavy in one country or another plays in also. It is a major commitment to see the investment through the product cycle. There was a lot of long term investment in China for example from the Chinese government and many US companies also. Not every move made by Americans just plan for the extreme short term profits and sometimes short term and long term can both be attained.

One thing not mentioned yet is the environmental cost. In the west there are laws that you can not just dump poisons down the drain or up the smokestack. This applies at all levels of mine waste, power plant smoke, polluted rivers and ground water.
I understand many countries give hazard pay to embassy employees stationed in Beging since their life is shortened by breathing the air and drinking the water.
Bill D.

Energy ,taxes,machinery,labor.

How long does a $300k CNC machine last? 10,000 would be 30 bucks an hour.plus tooling, energy and upkeep..
Saw a shop in India making big lathes chucks on old machines that must have been 50/60 years olds..

Qt Bill: [ In the west there are laws that you can not just dump poisons down the drain ].... should say In the USA..
That costs US manufacturers a lot. Much the reason some government want to stop place of origin.. so to give another advantage to poison tainted food countries. Seems some government people want to rid the USA of dirty jobs.

michiganbuck said:

Energy ,taxes,machinery,labor.

How long does a $300k CNC machine last? 10,000 would be 30 bucks an hour.plus tooling, energy and upkeep..
Saw a shop in India making big lathes chucks on old machines that must have been 50/60 years olds..

Qt Bill: [ In the west there are laws that you can not just dump poisons down the drain ].... should say In the USA..
That costs US manufacturers a lot. Much the reason some government want to stop place of origin.. so to give another advantage to poison tainted food countries. Seems some government people want to rid the USA of dirty jobs.

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I hear this a lot- BUT- its much worse in Europe, and yet they seem to still make, and export a lot- in many categories, they eat our lunch.

For instance, the Italians pretty much own the large plate roll market- and in Italy, everything is taxed more, wages are higher, almost everybody is unionized, hard to fire, and regulated more.
Yet, in a bunch of industries, from firearms (Beretta) to CNC machines that make ceramic tiles and sinks, to fabrication equipment like cold saws or 2" x 20' plate rolls, to jewerlry making equipment, the Italians do great.

Or Germany- they export all kinds of machinery, autos, manufactured goods, and most are better than american products- but again, taxes, regulation, environmental laws, wages- all much higher and tougher than here. BMW and Mercedes sell like crazy to the Chinese, but so do companies from both Germany and Italy that make teabag making machines, or cnc pill presses for aspirin tablets. I bought a CNC ornamental iron machine from Germany, because we dont make em.

Lots of other examples of countries with higher costs, more strict laws, and higher taxes and wages than we have, who somehow do better than we do- so I cant believe its all just because we dont let our towns put lead in the water supply- Oh, wait we do let them do that.

Ries said:

I hear this a lot- BUT- its much worse in Europe, and yet they seem to still make, and export a lot- in many categories, they eat our lunch.

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So why have they seemed to have less of a problem with deindustrialization than we have? Interestingly, I just now looked at the EU's trade balance with China and the US's. The EU runs a not-quite 0.2% of GDP deficit w China. The US runs a little over 2% - over 10x as much.

nyc123 said:

So why have they seemed to have less of a problem with deindustrialization than we have? Interestingly, I just now looked at the EU's trade balance with China and the US's. The EU runs a not-quite 0.2% of GDP deficit w China. The US runs a little of 2% - 10x as much.

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deindustrialization is a problem in europe, but not as bad. What they tend to lose are the lower technology, high labor jobs, in places like Italy- hand knitting hundreds of sweaters, leather purse making- basically, the mass produced low cost items move to low wage countries, the same way that first New England lost textile manufacturing to the Southeastern US, and then the Southeast lost it to China, and, now, China is losing it to Vietnam and Bangladesh. Tube socks, towels, bed sheets, sewing thread, stuff like that there is very little profit in.
What the smart european countries have done is move upmarket- to machines that make machines, to airplanes (Airbus) to luxury yachts, to high end designer clothing, to the best in any given category.
I can buy a made in China 4 1/2" grinder from Harbor Freight for twelve bucks- instead, I buy made in Germany Metabo's and Boschs for ten and even twenty times that much- but the quality is much better, the reliability and rebuildability is there.
I still buy the occasional made in Switzerland hand power tool, but they dont compete directly with Chinese made tools- and that is intentional on the part of the europeans.
They also have government intervention, in terms of ownership laws, union laws, foreign investment rules, subsidies for domestic manufacturing, and outright government ownership of strategic industries (as do the Chinese). The french government owns a piece of airbus, auto companies, nuclear power plant manufacturers, steel mills, large forging companies, and more. The Bavarian state government owns a big piece of VW.
In essence, the State often picks winners and losers, based on their opinion of national needs, and jobs.
All of this, in countries like Germany and Italy, helps support companies that manufacture and export, intentionally.

Do you think it's possible to make simple-ish metal parts competitively, as a one or two man show, in the US by having a small foundry using scrap metal (like Chinese foundries, the super small ones using scrap that successfully undercut large ones), powering off renewable energy w/ batteries, and then machining the part on older mills/lathes that have been switched to automated mills/lathes? I know a company that will do this with older mills/lathes. Even if it's small profits, if done in volume.....I'm asking if just on the costs of one unit, do you think it's possible to do this? For example, lowering links for a dirt bike.

I'm considering trying to do this (small foundry, renewable energy + old equipment) and seeing if I can sell products on Amazon, etc., and beat cheap import prices using flat-rate boxes from USPS.

nyc123 said:

Do you think it's possible to make simple-ish metal parts competitively, as a one or two man show, in the US by having a small foundry using scrap metal (like Chinese foundries, the super small ones using scrap that successfully undercut large ones), powering off renewable energy w/ batteries, and then machining the part on older mills/lathes that have been switched to automated mills/lathes? I know a company that will do this with older mills/lathes. Even if it's small profits, if done in volume.....I'm asking if just on the costs of one unit, do you think it's possible to do this? For example, lowering links for a dirt bike.

I'm considering trying to do this (small foundry, renewable energy + old equipment) and seeing if I can sell products on Amazon, etc., and beat cheap import prices using flat-rate boxes from USPS.

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Very unlikely, if we're talking some generic part rather than a uniquely designed item. You'll have no economies of scale, quality from your foundry will probably be crap, and old machines and manual labor will be unproductive. "Renewable energy" also isn't going to save you a thing powering old 60% efficient motors. And marketing and distribution of your one-of product isn't even mentioned. Wouldn't locate in "NYC" either, if that's what your handle suggests.

The motivation is different, too. In China the number of workers you have is a matter of significant social prestige. So employing 5000 people to make a million dollars a year profit is optimal. You get incentives from the government for employees. Here we find it more impressive to find a way to move some numbers around on a screen and make a million dollars by yourself. We even call it "capital gains" and tax it half as much.

You hit what you aim for and you get what you ask.

PeteM said:

Very unlikely, if we're talking some generic part rather than a uniquely designed item. You'll have no economies of scale, quality from your foundry will probably be crap, and old machines and manual labor will be unproductive. "Renewable energy" also isn't going to save you a thing powering old 60% efficient motors. And marketing and distribution of your one-of product isn't even mentioned. Wouldn't locate in "NYC" either, if that's what your handle suggests.

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I'm not in NY anymore, and I meant generic parts. I looked into stainless steel straws and it seemed like it's possible to make them near what they're selling for, and that's just using old processes. Buying extruded/welded tubing, cutting, bending, deburring, polishing, and then selling. Marketing/distribution, I meant just buying flat-rate boxes and sticking them in there in some wrap. It looked possible. But that's tubing, not really a machined part. But it also wasn't through really taking up much of the supply chain - only after the tubing comes out of a mill. So it makes me wonder what's possible by taking that a lot farther and trying to cut other costs out on other products, and sticking a nice "Made in America" sticker on it, marketing it with a video as made in America, etc.

nyc123 said:

I'm not in NY anymore, and I meant generic parts. I looked into stainless steel straws and it seemed like it's possible to make them near what they're selling for, and that's just using old processes. Buying extruded/welded tubing, cutting, bending, deburring, polishing, and then selling. Marketing/distribution, I meant just buying flat-rate boxes and sticking them in there in some wrap. It looked possible. But that's tubing, not really a machined part. But it also wasn't through really taking up much of the supply chain - only after the tubing comes out of a mill. So it makes me wonder what's possible by taking that a lot farther and trying to cut other costs out on other products, and sticking a nice "Made in America" sticker on it, marketing it with a video as made in America, etc.

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I think you are missing the point with all that has been explained. Generic parts are exactly the type of parts that your approach will not be good at.

Why make a part for minimal margin that has a low value? Unless you can literally live on $300 per yr. income and survive, you will have a very very difficult time in being able to generate enough dollars/hr. Remember, there are only 8760 hrs. in a year. At a minimum you will need to generate enough dollars per work hour to accomplish your needed income level plus expenses.

No matter how much cost you can squeeze out of a product, you still have to make enough to reach the needed hourly rate. Zero overhead with 100% profit is not enough unless there is the needed hourly rate of return.

This is the very thing that keeps third world countries in poverty. They have an extremely low monetary value on the value of the labor. Since there is little value in wasting labor, much effort goes into just subsidence labor trying to exist.

A point for you to ponder. Time is they only thing that we are all evenly given meaning the poorest human and the richest person both have 60 minutes in an hour. The poor man is poor because he is doing little economic value with his 60 minutes and the rich man is doing much economic activity with his 60 minutes.

Pete's suggestion for the starving artist approach is much more viable than your approach. Your chances of success is much greater in trying to do one high value item with low technology than attempting to compete with a large number of low value parts.

oh well, I appreciate all the input. It's a pet project of mine that I thought would yield (very best case) some sort of business and (worst and definitely most probable case) learning a lot about manufacturing and trade. I have rental properties that are paying my way for me to live on a shoestring, so I don't have a job or need income from it, and I have money that I could throw at it, although I'd put a pretty strict limit on that. Thank you for all the insight, I have definitely gotten quite a bit out of this.

Ries said:

I hear this a lot- BUT- its much worse in Europe, and yet they seem to still make, and export a lot- in many categories, they eat our lunch.

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someone eating your lunch in one sector or another is why trade works - they do what they do best and vice versa. Overall, US manufacturing is considerably higher than the EU as a percentage of GDP and in Italy for example wage rates for welder fitters are significantly less than I pay. I bet the guys that make Schaublin lathes and 911 turbos get paid well, but the 0.1% pinnacle of a market is a small place. They occupy that space, but Haas makes a lot more money and contributes a lot more to the economy than Schaublin does. Point being, not that you shouldn't pay attention and try and learn from the other guy, but the sentiment that Europe has got manufacturing right and we don't doesn't stand up to the facts.

As for where something gets made, its mostly cost and in second place can be industrial capacity. Lots of factors go into cost, and its not always cheaper to make there, manage there and ship here. That's why we such a large manufacturing sector here. With their lower labour costs, why isn't everything made there? Traditionally the answer has been productivity differences, but that seems an advantage that will be hard to maintain - they're not exactly squatting in mud fill yards tapping away with mallets. Of course there is costs to overcoming business culture and language barriers (that includes QA), shipping etc. I know I compete with it all the time if there is any volume to the fabrication. A hydrovac truck manufacturer I used to make things for now brings the tanks turrets booms and bumpers for the half the cost of buying here. Steel is comparable, energy more, but the the labour cost is still substantially less. If put aside shipping and management challenges, you have to have greater productivity here to overcome it