| Spring
2004 |
Manufacturing/Distribution Advisor
|
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The Pros and Cons of Offshore Production
Eased
trade restrictions are luring more and more American manufacturers to
distant shores, where low wages promise the chance to meet global
competition.
Mexican
assembly plants, known as maquiladoras, got a big boost from the 1994
North American Free Trade Agreement. Now, a year after China’s entry
into the World Trade Organization, that country is the site of choice
for many U.S. manufacturing companies. Manufacturers also find
attractive incentives in other nations in Asia, the Caribbean, and
Central America.
But the
opportunities come with substantial risks requiring careful
evaluation.
Opportunities
The
opportunities are undeniable.
Impressive advantages flow from reduced labor costs in developing
countries. Mexican factory workers make about $2.50 an hour, including
wages and benefits. Figures in China are hard to nail down, but informed
estimates peg wages at somewhere between 50 cents and $1 an hour. In the
United States, on the other hand, manufacturing workers average $15.41
an hour.
Also,
some companies are drawn offshore by less restrictive government
policies — particularly environmental rules. Access to new markets is
another plus, along with proximity to sources of less costly parts and
supplies.
Risks
But the
risks can be substantial.
To begin,
the sheer distance from headquarters makes it more difficult to exercise
the careful supervision required to maintain control over product
quality.
Costs
connected with the physical move of assets and personnel can be very
high, especially when the new operation is in Asia. And once you’re
there, expensive surprises may continue, in the guise of unexpected
infrastructure problems. Inadequate roads, rail lines, and utilities,
for example, can impede efficient supply flow and product distribution.
You also
are likely to encounter water shortages and insufficient sewage
treatment facilities, affecting not only production capacity but also
the human needs of your work force.
Culture Shock
Differences in language and culture may present the greatest adjustment
challenge.
The
informal culture of the United States has bred a work force responsive
to a light hand of supervision that encourages them to recognize and
solve many minor production problems without specific instructions. In
the more regimented developing world, workers are likely to await clear
orders from authorities for each step, creating a need for more intense
supervision.
Other
differences in experience may show up in specific work habits, for
example in worker attitudes toward preventive maintenance.
American
workers accustomed to maintaining household appliances and automobiles
know the value of taking care of equipment. But employees in countries
where spare parts are hard to get may find it strange to fix something
before it’s broken.
Likewise,
record-keeping requirements in a modern factory may bewilder workers
who’ve never had a bank account or a credit card.
Safety
Overseas
wages may be lower, but some labor costs may approximate those at home.
For example, following lower overseas standards on questions such as
child labor and employee safety can damage the reputation of a U.S.
company and create legal problems.
In one
recent Texas case involving the deaths of 14 workers in its Mexican
operation, a U.S. garment manufacturer faced a $30 million lawsuit. The
workers were killed when a company bus ran off the road. Plaintiffs in
Rodriguez-Olivera v. Salant Corp. accused the company of skimping on bus
safety and driver training.
Tax and
currency questions present another area of uncertainty. Maquiladoras
have lost some of their cost edge with the expiration of many of their
early tax exemptions. In the two-tiered Chinese tax system, domestic
producers have an advantage over foreign investors.
Margins
are subject to sharp changes with unpredictable sudden shifts in
currency value, like the 1999 rise in the Mexican peso.
Even more
troubling is the possibility of political disruptions. In extreme cases,
upheavals may result in governmental expropriation of foreign
investments.
With this
complex set of variables, offshore ventures require thorough planning.
Substantial financial resources are required for such projects, along
with cultural understanding, patience, and flexibility.
Editor's Note: Bober, Markey, Fedorovich
& Company has available significant valuation expertise to help our clients objectively challenge their acquisition targets. Please call your partner / manager contact if you would like assistance in this area.
Manufacturing/Distribution Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's
Manufacturing/Distribution Team. If you would like additional information about the services that we can provide to manufacturers and wholesale distributors, please call or email our team leader, James E. Merklin, CPA, M.Acc. at (330) 762-9785 or
jimm@bobermarkey.com.
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