Ocean shipping costs can dramatically change the cost advantage of Chinese labor

Ocean shipping rates from China to US have experienced some very large increases recently.   After rates dropped in 2011, we are seeing significant rate increases.  This cost increase could translate to a $900.00 increase on a 20 ft container.   The economical impact on this increase depends on how many products can fit into a 20ft container.   This factor combined with other cost factors is making China a less attractive manufacturing source for US goods.

Here is a made up example that can show how the cost equation is changing.

Let’s imaging that five years ago, a company decided to build its widgets in China instead of a US plant.  Five years ago the labor savings on a part that took about 1.2 hour’s labor was significant.

The equation breaks down as such:

2007 Scenario

US labor cost per widget=$16.00
China Labor cost per widget =$3.00 (assumption is that US labor has higher productivity rate)

Shipping logistics cost per widget from china – $1.5 

Total savings per widget was $11.50.

For a company that built and sold 100,000 widgets per year, the annual savings in this scenario was $1,150,000.  For that amount of savings, a business could afford a couple of trips a year to monitor the supply chain and be willing to put up with the time differences and endure other costs due to having the manufacturing source 1000’s of miles away.

2012 Scenario

What happen to US labor in the last 5 years?   In some areas the labor rate has actually gone down by almost 10%.

What happen to Chinese Labor in last 5 years?   It has increase by nearly 300%!

What happen to ocean shipping cost?  It has more than doubled!

Today the equation looks a little different:

US Labor cost per widget =$15.00

China labor cost per widget=$9.00

Shipping cost per widget= $3.00

Total savings per widget is now $3.00.

So for the same 100,000 units there is now an annual savings of $300,000 per year.  Still a good chunk of change for a small to medium sized manufacturer, but that savings can be further eroded by

  • Extra Inventory needed in the supply chain
  • Communication costs
  • Added overhead to handle logistics

In short, the overwhelming cost advantages that were in place 5 years ago have shrunk significantly to where many US manufacturers are reconsidering.   In cases where the product is larger, the added freight costs could actually be more per product.

This is a made up example, but we think it does demonstrate one of the reasons that some Chinese Manufacturing is returning to the US.