Cheap labor—It's all relative

Toronto, Canada's star.com reported March 5 that Ontario lost more than 77,000 manufacturing jobs from 2001 to 2006, according to the latest employment trends report from Statistics Canada. Labor market experts believe that trend is likely to stretch well into 2008 and beyond. Quebec lost 56,600 in the same time period.

Among the reasons cited for the losses was the disparity between Canadian labor costs and those in other countries, including the U.S.

"Ontario is largely the manufacturing centre of Canada. If the Canadian dollar stays high, and there's all indications it's going to, manufacturing will have a tough time in this country, no question," said Chris Higgins, professor at the Ivey School of Business at the University of Western Ontario.

"We benefited for years and years with a 65-, 70-, 80-cent dollar, but now with parity, labor costs in the States are so much lower than ours. And of course, Mexico and other places around the world are even drastically lower. It's going to be tough for us."

The day after reading this item, I received an e-mail from a longtime friend who works for a Fortune 100 U.S. company that traces its roots to 1885. She's been with this company for decades. She wrote that her facility plans to outsource its manufacturing to the Far East over the next two years, and in the process, 400 jobs will be cut.

There's no question that jobs are migrating to countries with lower labor costs, whether from Canada to the U.S. and Mexico, or from the U.S. and Mexico to China and India. Companies thinking about seeking lower labor costs on foreign shores might be wise to read Cheap labor carries hidden costs published last month by the International Herald Tribune. There's more to reducing costs than cheaper labor.

Andy Mukherjee of Bloomberg News wrote, "The draw of cheap Chinese and Indian labor is so strong, and the media hype surrounding it so relentless, that some starry-eyed, developed-country executives are losing sight of the bottom line.

"So acute is the 'Chindia' fever in some businesses, notably the auto industry, that even the common sense of adapting manufacturing practices to make the best use of the region's labor endowment is being discarded.

"Still, it's reasonable to inquire what, if anything, cheap and bountiful Asian labor has done for these companies. That's the question that Boston Consulting Group asked of senior executives at more than 40 European, Japanese, and North American original equipment makers and suppliers. The answer they got was staggeringly counterintuitive.
'Cost savings have been disappointing,' Nikolaus Lang, a partner at the consulting firm's Munich office, said last month in 'Winning the Localization Game,' a study he has co-written with two colleagues. 'Nearly two-thirds of the companies we analyzed reported that their unit costs in China or India were equal to or higher than the unit costs in their home countries.'" Nearly two-thirds!

Mukherjee continued, "Sounds improbable? Lang and his colleagues provide a breakdown of what's causing the benefits of inexpensive labor to dissipate. The main culprit, according to their analysis, is that factories in China and India are smaller than in developed countries, thus not allowing economies of scale. Besides, it also costs companies more to ensure product quality in Asia. The in-house rejection rates are higher than they are in the West."

Before outsourcing, do your research, and remember, you get what you pay for. In many cases, cheap labor equals poor quality and higher costs.