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Going Offshore:
Faraway
places with low wage bases are luring more and more American manufacturers,
as global competition tightens margins and new international agreements ease
trade restrictions.
First, the 1994 North American Free Trade Agreement heightened the appeal of
production in Mexican assembly plants, known as maquiladoras. Then, just one
year ago, 15 years of negotiations led to China’s entry into the World Trade
Organization. Other nations in Asia, the Caribbean, and Central America also
offer attractive incentives for American manufacturers.
Despite the appeal, opening a manufacturing facility abroad presents
substantial risks as well as opportunities.
Enticing Opportunities
First, let’s look at the opportunities.
Without question, low-skilled workers’ wages are lower in developing
countries. Factory pay in Mexico runs about $2.50 an hour, including wages
and benefits, and in China the figure is even lower, somewhere between 50
cents and $1 an hour. In contrast, U.S. manufacturing workers average $15.41 an
hour.
Less restrictive government policies — particularly environmental rules —
appeal to some manufacturing operations, as does the access to new markets.
Parts and supplies may also be less costly.
But risks can be formidable.
For some, the biggest threat may be reduced control over product quality that
may come with the distance from headquarters supervision.
The cost of the initial move can be very high, especially for a move to Asia.
Inadequate roads and rail lines can increase costs. The time in bringing
products to market, and border complications present another area of delay.
Other lacks in infrastructure — inadequate utilities, scarce water,
insufficient sewage treatment facilities, for example — must also be
anticipated.
Cultural Differences
Perhaps the biggest wild card is the challenge presented by differences in
language and culture.
U.S. employees are accustomed to the light hand of supervision that comes
with our informal culture, but workers used to more regimented societies may
need firmer direction. Standards of preventive maintenance, easily understood
by American workers used to maintaining household appliances and automobiles,
may puzzle employees from a society in which spare parts are hard to get.
Likewise, employees who’ve never had a bank account or a credit card may be
bewildered by record-keeping requirements in a modern factory.
Safety Standards
Even though wages are lower overseas, some costs may be closer to those at
home. For example, U.S. companies may well have to develop uniform safety
regulations throughout all of their international operations.
A U.S. garment manufacturer recently settled a $30 million Texas lawsuit
resulting from the deaths of 14 employees in its Mexican operation. 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.
Then there are tax and currency uncertainties. Many exemptions that gave
maquiladoras some of their cost edge have expired, and China has a two-tiered
tax system that favors its domestic producers over foreign investors.
Unpredictable shifts in currency, as with the 1999 rise in the Mexican peso,
can sharply alter margins.
Even more unsettling is the difficulty in predicting political disruptions
that can throw foreign investments into limbo. In extreme cases, overseas
facilities may be lost in expropriation by a new government in the host
country.
In short, good planning is essential in undertaking any offshore ventures. A
careful assessment of labor cost savings must be balanced against risks.
Substantial financial resources are required for such projects, along with
cultural understanding, patience, and flexibility.
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