The comments that I make in this article are general and not related to any market in particular however I am involved in the barbecue market and I recognise that there's a lot of sensitivity around barbecue and smoker products traditionally made in America that are slowly migrating towards Chinese manufacture. My rationale for writing is to try to level some of the arguments in my mind and so understand what's going on in the heads of the barbecue manufacturers.
The retail sector is coming under greater and greater price pressure as manufacturers fail to differentiate their products clearly and so price becomes a significant factor in any buying decision. As prices reduce so every manufacturing operation comes under cost scrutiny and this is what drives a company to move it's manufacturing abroad. In addition there's also strategic issues such as the make or buy decision which is actually a lot more important.
For a decision to be made to take manufacturing abroad care must be taken to ensure that the right products are selected for low cost country manufacture because costs can easily spiral should volumes diminish or the product mix changes. Companies can make an awful lot of money with low cost manufacture only to lose it all in slow moving and obsolete inventory in the supply chain.
Let's consider the make or buy decision. When moving a manufacturing operation, it's inevitable that the native operation will have to be closed and a brand new operation set up in the low cost country. It's highly unlikely that the existing workforce would want to migrate, it would probably defeat the object on moving and legally there's no reason to do it so in effect the manufacturing company has a blank sheet of paper from which to work. This allows the barbecue company to completely outsource its manufacturing operation and therefore move manufacturing costs from a fixed to a variable basis.
If your costs are fixed, the overall total cost of manufacture is significantly affected by the volume of product made. For example, if it costs $10,000 to operate a production line and you make 1 unit, the cost of that unit is $10,000 but if you make 20 units on that same production line the cost of manufacture is $500. If you're sales price is $1,000 per unit then you break even point is when you make 10 units.
Let's assume that you have outsourced the manufacture of your product and for every unit you pay $600. Assuming you still sell for $1000 per unit, you make money whether you sell one unit, ten units of more. The point is that this model is risk free albeit the argument against is if you can guarantee a high volume and a steady demand then you can manufacture in house at significantly lower cost.
Should you move to a low cost country then the maths of this argument will have to be recalculated because for sure, the cost of manufacture would be lower than your current outsourced costs of $600 per unit. It's also possible that despite there having to be an “extra” profit margin in the chain, the outsourced manufacturer can probably make greater efficiencies with economies of scale, perhaps by making barbecues for more than one company. Ever wondered why more and more barbecues are starting to look the same?
Of course, as the barbecues start to look the same, we public look to the only obvious differentiator and that means price, and so the cycle continues. So long as we consumers continue to drive the market by price, we just have to accept that manufacturing is going to leave our country in order to remain competitive.