Labour cost forms a significant part of the eventual price of a product. Given that some companies adopt a “production at what cost” approach to gain competitive advantage, companies would want to target labour cost as a possible area to cut costs. Different countries have different labor costs depending on several factors for example, union activity and minimum wage legislation.
China, India and Mexico are amongst the lowest labor cost countries in the world. In 2010, China’s hourly rate was approximately $ 1.82 per hour while Mexico’s was $ 3.46 per hour. India’s hourly rate was $1.72. The labour cost of India is expected to rise and may soon reach the rate for China. Labour costs in these three countries are expected to rise with the increase of the dollar value with respect to the currencies of these countries. This is because workers will demand for higher rates to compensate for the now more expensive products. If the dollar depreciates with respect to the local currency, the wage rates will likely remain at the existing level because of union resistance to wage cuts.
There are advantages and disadvantages for a company to outsource production of a particular product to an independent manufacturer in another country. The major advantage is the freed up funds that can be used for other ventures. The disadvantages are many though. Political risk, transportation and customs, currency risk, control risk, are just but a few of them (Blackerby, “Moving Overseas a Mistake?”). Companies must also consider the market where the products are to be sold. Production would be better near the market to reduce transportation cost. Companies would be better off producing inhouse, to avoid the above mentioned risks. A manufacturing company that wants to sell its products worldwide has to take into consideration the following recommendations; know why it wants to compete globally, ways to do business globally, have an international business plan, form connections in the new markets, know how it will price its products competitively, how it will get paid and if it has enough resources to go global. If a company was to outsource, Mexico would be the better place to outsource from because the manufacturing labour costs for China and India are expected to rise in the coming years ( Sirkin, “Mexico: A Better Choice than China?”). Mexico also has waiver in import duty and companies can take advantage of that.
Blackerby, Phillip. Moving Overseas a Mistake? 2003. Web. 22 Aug 2012
Sirkin, Harold. “Mexico: A Better Coice than China?” Bloomberg Businessweek. 13 March
2009. Web. 22 Aug 2012