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Crucial Production location decisions*

General Electric(GE) is a multi national conglomerate in New York City. For decades, GE has been at the forefront of the move in shifting production offshore from high cost locations within U.S. to cheaper locations like China.

However, wage rates in China and other developing nations have been rising fast. This has closed the differences between costs in the U.S. and overseas. In terms of U.S. Dollars, wage rates in China were five times higher in 2012 than they were in 2020 and they are still rising fast.

This gap between Chinese and U.S. is further closing down with the rise in labor productivity in U.S. Furthermore, high oil prices have raised the cost of shipping products across oceans. On the other hand, there is so much of cheap natural gas in the U.S, which helps to lower production costs.

For example, considering GE’s Geo Spring Water Heater, it was originally designed in the U.S. and manufactured in China. This was then shipped back for sale in U.S.

However, in 2010, with the macro trends in labor productivity and energy prices, GE decided to see what would happen if it brought some of its appliance products back to U.S. With the Geo Spring being considered not easy to manufacture due to poor design, GE redesigned the product, eliminating about 25% of material costs. As a result, Ge could produce the product within 2 hours in U.S. in comparison to 10 hours in China. Thus, GE’s material costs and labor requirement went down and product quality went up.

Therefore, GE could reduce the price of Geo Spring by 20% than the Chinese Manufacturing cost and still maintain a profit margin. This improved the time to market too; reducing it from 5 weeks to a number of days. This led to improved inventory management too.

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Thereby, now GE is trying to get the other productions also done in U.S. Accordingly, GE plans to have 75% of the revenue from American made appliances.

Stay tuned with Zeeable for more of such updates and news!!

2 Comments

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