Study shows cost competitiveness of U.S. manufacturing lower

Battered and bruised in 2009, U.S. manufacturing faces serious challenges as American manufacturers slipped to from fifth to eighth in a new a ranking of cost competitiveness released February 3 by AlixPartners LLP, a global business-advisory firm. The study shows that Mexico continues to lead as the No. 1 low-cost country (LCC) for outsourcing from the U.S., while China, improving considerably over last year's study, still came in sixth.

"There is no doubt that economic forces worked against U.S. manufacturers this past year," said Stephen Maurer, a managing director with AlixPartners and a leader of the firm's Manufacturing Improvement practice. "This study shows that despite recent improvement in U.S. productivity, hungry global competitors have become even more formidable, both as out-sourcing destinations and as competitors to U.S. companies."

In last year's study, the Index showed that Mexico had jumped ahead of both China and India to take the top spot as the low-cost manufacturing source for the U.S. for the market basket of parts analyzed. It also showed that U.S. manufacturers gained ground on most overseas LCCs. The 2010 study shows that China has made a strong comeback, recouping much of its cost advantage relative to the U.S. However, China's improvement was not enough to wrest back the top ranking from Mexico, or the No. 2 ranking from India.

Vietnam, Russia and Romania, newly entering the ranks of the study this year, made impressive showings as Nos. 3, 4 and 5, respectively – all edging out China. Meantime, almost all of the countries analyzed improved their cost competitiveness relative to U.S. manufacturers.

Overhead, Equipment, Tooling Costs Also Deserve a Look
The study also helps highlight some of the complexity in determining the true lowest-cost manufacturing location.

"While most people think of labor, shipping and exchange rates as the principle variables in evaluating outsourcing costs, a variety of overhead costs can have a dramatic impact on the bottom line, and are often overlooked," noted Steve Hilgendorf, a director in AlixPartners' Manufacturing Improvement practice. "Things like electricity rates, tax burden and construction costs all vary widely from country to country, and in many otherwise low-cost countries, capital equipment and tooling are actually more expensive than in the U.S., because they largely need to be imported."

"In today's highly dynamic environment, our study is a powerful tool for companies to understand the true costs underpinning their manufacturing and supply-chain strategies," said Maurer. "In the past, you could be relatively comfortable that the manufacturing-strategy decisions you made today would still be valid two or three years from now. That's not necessarily the case any more. Today's reality calls for constant vigilance and flexible strategies to ensure that companies stay ahead of global changes, rather than fall victim to them."

About the study
The AlixPartners U.S. Manufacturing-Outsourcing Index this year analyzed a variety of manufactured products and compared the cost to build these items in 12 low-cost countries vs. the cost of doing so in the United States. The analysis covers well-established LCCs like Mexico, China and India, as well as emerging countries such as Russia, Romania, and Vietnam. It tracks changes in seven key cost drivers (exchange rates, labor costs, transportation costs, raw-materials costs, inventory costs, capital-equipment, and overhead costs and duties) and their combined impact on total cost for a range of fabricated parts and products by country.

About AlixPartners
AlixPartners LLP is a global business-advisory firm offering comprehensive services to improve corporate performance, execute corporate turnarounds, and provide litigation consulting and forensic accounting services. The firm's specialty is urgent, high-impact situations when results really matter. The firm has more than 900 professionals in 14 offices across North America, Europe and Asia.