Dispelling the Manufacturing Myth American Factories Can Compete in the Global Marketplace (1992) / Chapter Skim
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2 CONSUMER ELECTRONICS
2 CONSUMER ELECTRONICS
Pages 21-44
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From page 21... ...
Each company chose to locate facilities abroad for different reasons: AT&T sought rapid cost reductions achievable from lower labor costs abroad, and Toshiba sought greater market access security. The committee's analysis of the manufacturing costs of these two products revealed how complex site selection can be.
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From page 22... ...
The Toshiba analysis demonstrates that the manufacturing cost for a color picture tube is actually lower In the United States than in Japan (a function of exchange rate differentials)
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From page 23... ...
The attributes or "attractors" that initially brought AT&T to foreign manufacturing locations were: · access to low manufacturing costs: materials, labor rates, duties (Generalized System of Preferences status) , taxes, transportation · access to skills (engineers, technicians, managers who had not been "tainted" by outdated management styles)
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From page 24... ...
make foreign manufacturing locations attractive for labor-intense operations, AT&T's study showed that in-plant direct labor, in fact, accounts for a small proportion of production costs for the products examined. Even with a wage differential as high as 85 percent, the low percent
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From page 25... ...
For other than consigned parts, the offshore cost advantage ranged from 13 to 28 percent. age of labor costs in COGS (9 percent)
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. Typically, about half of load costs are incurred in fixed building-related costs, equipment depreciation, salaries for indirect labor, and other direct costs.
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AT&T's onshore plants have historically reduced their own loads by about 5 percent each year through the more efficient information and engineering systems that have been installed to enhance white-colIar productivity. Similarly, it is assumed that offshore OEMs make the same kinds of improvements and so will continue to maintain appreciably lower load costs.
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From page 28... ...
A 7 percent decrease in manufacturing costs, in turn, is often enough to make higher-technology products made in the United States cost competitive with those produced offshore. This cost differential in materials is in part a consequence of U.S.
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From page 29... ...
To keep its onshore, higher-end telephone manufacturing effort cost competitive, AT&T is attempting to make at least a 10 percent recluction in its materials costs by reaching global material purchasing agreements with its offshore suppliers. Instead of buying materials from a Far Eastern supplier's distributor in the United States, AT&T is negotiating bulk purchases at the supplier factory and assuming the cost and logistics of shipping and distributing the items to its own factories.
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From page 30... ...
Analysis of Functional Drivers Impacting OEM Costs Moving production offshore to OEMs incurs costs that need to be quantified and added to an OEM quote when assessing the cost advantage of manufacturing or sourcing abroad. These cost adders include: transportation and duties qualifying OEMs start-up and management costs for OEM vendors quality inspection and management accounting for central expenses (overhead)
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From page 31... ...
An important consideration is the fact that this major cost factor is a variable one; a country with GSP status one year can lose it the next as a result of unforeseen political or economic changes. A case in point is Singapore, which supplied AT&T with corded and cordless phones under reduced duties until 1990, Workers assemble cordless telephones at AT&T's plant in Singapore.
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From page 32... ...
Whatever upstream costs are incurred in quality improvement are more than offset by Tower rework costs, less wasted materials, higher efficiency of work flow, fewer returns, and fewer dissatisfied customers. There are, however, certain up-front costs associated with ensuring quality in an offshore operation.
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From page 33... ...
Onshore manufacturing is attractive in this respect because, even when an OEM is quickly able to build to a customer's specific order, ocean transport is an una~roiciable delay. Because availability is a major issue in a consumer market, firms facing potential bottlenecks in the pipeline from their offshore suppliers must carry additional inventories.
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· It is most difficult to overcome offshore cost advantages for Tow-technology, labor-intensive products. Included are products that will remain above cost parity even after onshore cost initiatives like global component purchasing are implementedpotentially any product that costs less than $50 for fully loaded manufacture.
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. · Onshore cost reduction programs need to be aggressiveTy pursued with specific targets if domestic operations are to
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approach parity with offshore operations. Highlighted AT&T programs include global component purchasing and continuous load reduction.
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As a proportion of total costs, Toshiba pays less for glass in the United States than it does in either Thailand or Japan, pri TABLE 2-3 Thirteen-inch CPT Manufacturing Cost Comparison: Himeji vs. Thailanda Himeji Thailand Cost of materials Direct labor Factory overhead Total aIndexed to 1000 689 (68.9%)
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suppliers in 1990, and a plan is in place to raise that to 100 percent within the next few years. Labor Costs Although direct labor is far less than 10 percent of CPT production costs, and therefore is not a major driver in location decisions, the rate at which workers learn their jobs and improve productivity has an important impact on how quickly a plant becomes competitive.
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From page 39... ...
and Japanese wage and benefits costs would be equal at an exchange rate of 242 yen per dollar, giving the Japanese plant a slight labor cost advantage on the basis of higher productivity at that rate. What accounts for this productivity difference?
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government and the state of New York. When automated production was introduced in CPT manufacturing in 1980, continued participation required large equipment investments.
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From page 41... ...
Summary Observations: Toshiba Color Picture Tube Manufacturing Toshiba's experience manufacturing CPTs in the United States prompts the following observations: · The primary consideration in Toshiba's decision to locate in the United States was market access. · Labor is less expensive in the United States than in Japan at recent exchange rates, but it is such a small component of production costs that it has only a small impact on the relative cost competitiveness of Toshiba's plants worldwide.
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From page 42... ...
Unlike AT&T, Toshiba was primarily concerned with market access; its domestic facilities were aIreacly working at worIcl-cIass levels. By manufacturing in the United States, Toshiba could increase the local content of the products it was selling in the United States, thereby assuaging American discontent with the dominance of Japanese imported consumer electronics goods.
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Speeding progress through the product realization process is another way of overcoming onshore/offshore cost differentials.
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From page 44... ...
4. Unless otherwise noted, Toshiba data were obtained from Kinichi Kadono, Senior Executive Vice President, Toshiba Corporation, "CPT Production Experience in the United States," presentation to the Committee on Comparative Cost Factors and Structures in Global Manufacturing, April 6, 1990.
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