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EDN Europe's Editor Graham Prophet posts a selection of comments and insights prompted by the many items of industry news and rumour that cross the editorial desk or are gathered on his frequent travels to interviews, press conferences and events around Europe - and further afield - and somehow never find their way to the magazine or the web site, recovering some of the information otherwise lost in the noise level...

Friday, September 19, 2008

Low-cost heads towards average-cost

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Last weekend, the business section of one of the UK’s Sunday newspapers carried a story headlined, “Is China running our of steam? – cheap era is over…..”. The premise of the article was that with increased costs and rising fuel bills for transportation of materials and finished goods, some western manufacturers are moving production to other low- or lower-cost Asian countries or (even) bringing operations back from the Far East.
Who would have thought that? Well, just about anyone who stopped to think about it for more than a minute or two, in fact. Rising fuel bills are just one factor; even the hydrocarbon sludge that big container ships or bulk carriers burn, is tracking the global oil price and inflating the overheads. But what many enthusiasts for the low-cost manufacturing regime – which has been built largely on low-cost labour – seem to overlook is that, just as China is industrialising faster than any economy we have ever seen before, the personal aspirations of its people are rising equally rapidly. You can’t hold on to a big cost margin for too long in that scenario.
Shall we see a resurgence of volume manufacturing in the European area, re-located back from Shanghai and its hinterland? Some, maybe; the most likely scenario I can imagine is that you’ll see some tentative re-allocation of production to Europe’s lower-cost fringes. Any wider move could cut both ways; if a lot of production does come back it’s likely to be highly automated work; good for contract assemblers and production-machinery builders, not much impact on employment.
But don’t expect a reconstruction of traditional European vertically-integrated enterprises with concept-to-manufacturing under one roof; those days are gone for good.

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