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Companies opt out of high cost manufacturing

There is a large amount of dollar bills falling in the air.
13 Dec 2013

Businesses don't have to sacrifice their bottom lines to produce great products - a sentiment some manufacturers are beginning to take to heart. For example, according to The Associated Press, General Motors recently announced by 2017 it will no longer produce vehicles in Australia due to high manufacturing costs. In fact, Reuters reported Ford will also be shutting down its plants in Australia as well. The price tag for fabricating and assembling products can creep up quickly. From purchasing quality materials from suppliers and paying workers to heating and cooling plants and transporting goods, companies that are in manufacturing must keep a close eye on their budgets to prevent costs from rising too drastically.

It is this need to cut expenses that propels so many companies to offshore manufacturing south of the U.S. border. Expanding to Mexico allows companies to save in workforce and transportation costs while still producing high-quality goods that can be shipped quickly to end markets. High cost manufacturing can be wasteful for companies, and many businesses try to mitigate the expense of producing goods in a certain country by adopting lean manufacturing principles.

However, costs can still rise suddenly in specific manufacturing areas. Factors like natural gas prices can dictate logistical costs and the entire supply chain. Companies that see these critical aspects of their production process increase - and stay high - might first adopt lean manufacturing and then realize offshore manufacturing is the better bet.

Australia's high cost manufacturing
According to Reuters, the recent quick drop in the worth of the Australian dollar compared to the U.S. dollar shows just one of the many reasons why manufacturers are looking to offshore manufacturing.

"The main difference is the strength of the Aussie dollar, which clearly is causing businesses to markedly re-assess the viability of ongoing operations as well as strategic direction," Savanth Sebastian, economist at CommSec, an online stock and share trading company in Australia, told Reuters.

In fact, Ford Australia Chief Executive Bob Graziano said the company lost a total of $581 million in the last two years. The AP reported GM's move out of Australia has been anticipated for months as costs increase, despite the Australian government providing financial incentives for the company to remain the country.

It's not just Australia's drop in currency value but its lack of affordable energy that is contributing to the movement to low cost manufacturing environments. FEN, a factory equipment news site in Australia, recently reported the country's gas market has declined.

Paul O'Malley, CEO for international steel company BlueScope, recently said energy has traditionally been affordable in Australia, and only a return of the country's gas market will help it stay competitive, FEN reported. According to Reuters, Australia's manufacturing performance dropped to a four-year low this past spring.

Yet Australia isn't the only country with high cost manufacturing. Producing goods in the U.S. is often more expensive for manufacturers in terms of labor costs and taxes. Many American companies have reshored parts of their operations cautiously, with some choosing to send part of their manufacturing processes to Mexico, where manufacturing is low cost but retains supply chain flexibility. 

Mexico's low cost manufacturing environment
Not many countries can boast they have experienced workers, a strong infrastructure, ongoing energy reforms and low wages - but Mexico can. The U.S.' neighbor has been a manufacturing power for some time, and increasing foreign investment is only showcasing the country's commitment to industry. Companies turn to manufacturing in Mexico because they understand they can maintain their bottom lines without having to send their production process all the way to Asia to do so. 

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