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China losing cheap labor allure

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China losing cheap labor allure

More U.S. companies find savings are drained by errors, shipping costs and engineering changes.

By Ron French / The Detroit News

STERLING HEIGHTS -- Hal Zaima was in love with China.

The owner of KenSa, an auto parts supplier based in Sterling Heights, gazed at the other side of the globe and saw things of beauty: factories ready to make his automotive wire harnesses, a favorable exchange rate and a limitless supply of workers willing to work for pennies, with more getting off trains each day from the vast countryside.

In fall 2004, KenSa sold its last American factory and was negotiating to form a joint venture in Wuhu, China. The ambitious businessman boasted that he would soon have 1,000 employees in China who would cost him about the same as 30 workers in Michigan.

A year later, KenSa has yet to produce one wiring harness in China, and Zaima doesn't know when, or even if, the company will.

"The honeymoon phase is over," Zaima said. "Some people are happy (in China) and some people are seeing the stark reality."

The rush to China has slowed to a jog. Companies lured to the communist nation by the promise of low wages are discovering much of the savings are being drained by transportation costs, engineering changes and error rates.

While U.S. companies are still moving to China, industry experts say momentum has slowed, and a question that seemed unthinkable even a year ago now is being asked in the offices of Michigan auto suppliers: Is it really cheaper to produce parts in China?

It is a bittersweet issue for American workers worried about outsourcing: Instead of returning home, some jobs that had gone to China instead are going to other less-problematic low-wage countries.

For years, suppliers have been pressured to move production to China, either by automakers that purchase their parts or out of fear of losing contracts to competitors moving to Asia.

Today, "these companies that were pushed overseas are starting to look at the actual costs," said Kim Hill of the Center for Automotive Research in Ann Arbor.

"When you add everything up, are you getting the part cheaper than you would here?" Hill said. "I think there is a real question."

It's a bottom line seldom examined a few years ago, when companies focused on the salaries of foreign workers. In China, auto workers earn roughly 40 cents to 50 cents an hour, with little or no benefits. By comparison, United Auto Workers are paid about $130,000 a year in salary and benefits.

It was in that frenzied economic atmosphere that KenSa began looking overseas. In 2000, the company, then called Clements Mfg., moved some production to Mexico. Lower labor costs in Juarez (workers earn about $1.35 an hour) kept the company afloat. When that wasn't enough, KenSa moved more production out of Michigan in January 2004, this time to Honduras, where workers earned 81 cents an hour.

Hoping to save even more, Zaima traveled to China in summer 2004 to negotiate a joint venture with an existing wire harness factory.

In a November 2004 Detroit News story chronicling the company's move across the globe in search of cheap labor, Zaima said the company's future was in China and other cheap labor countries.

Today, the man who was so gung-ho about China preaches caution.

"We bought the story that the OEMs (original equipment manufacturers) were selling to us more than we should have," Zaima said. OEMs that prodded suppliers to move to China a year earlier are today fretting over those same moves. "The OEMs say, 'You're not going to source this to China, are you?'" Zaima said. "Companies are going broke, saving money."

KenSa backed out of purchasing the factory and instead formed what amounts to an exclusive subcontractor relationship with the plant. So far, KenSa hasn't sent any work to the plant.

Last summer, Chinese workers at the factory KenSa was considering purchasing were confident of their future. Today, they have become victims of a kind of globalization whiplash. Many were laid off; others left because of lack of work.

Huang Wei was an ambitious worker at Tianhai Electric Co. a year ago. Today, she works seven hours a day, seven days a week, as an assistant in the jewelry department of Shangzhidu department store in Wuhu. Selling necklaces to Chinese who have scratched their way a few rungs up the economic ladder from the 23-year-old. Work behind the glass counters of the jewelry department is easier than that behind the machines on the factory floor, but Huang's 45-cents-an-hour pay -- about the same as she earned at the wire harness factory -- isn't enough to allow her to move out of her parents' home into her own apartment.

Zaima still might import parts from China someday, but he's over his infatuation with the country and its low-wage workers.

Some firms opened plants in China to support auto assembly plants there. But for companies such as KenSa that planned to export parts back to the United States, travel logistics were more of a headache than expected.

Frequent engineering changes insisted upon by the Big Three can make wire harnesses obsolete by the time they reach U.S. shores.

"We can put them on a boat and by the time they reach the United States, there have been two engineering changes," Zaima said.

Some suppliers in China have had to fly re-engineered parts to the United States to avert shutdowns, spending thousands more than it would have cost to ship by sea.

"If you take that supply chain and expand it miles and miles ... it's not going to work as it's written on paper," said Jim Applegate, an executive with National Logistics Management, a Detroit product transportation company. C. Peter Theut, a trade attorney with Butzel Long law firm in Detroit, refers to the "lemmings" that rushed to China "because somebody higher in the food chain had a gun to their head."

"If you're just going for the labor costs, that's not a wise decision," Theut said. Many Chinese factory workers are the children of peasant farmers and have no background in factory life. Many locations don't have reliable, 24-hour electricity.

Many parts suppliers discover that products manufactured in China have more quality problems, leading to complaints from the auto companies, Theut said.

There are still many companies moving to China, Theut said. But today, of every 10 companies that approach Butzel Long for help moving to China, two decide against it. "If they don't have a solid business plan, it's not the place to go," he said.

Zaima shied away from China because of shipping costs and logistics worries. The recent strengthening of the yuan -- China's currency -- made it even less attractive.

Will China's loss be a gain for U.S. workers? Probably not, Theut said. There are plenty of other countries out there without the headaches of China or U.S. costs.

KenSa would be broke if it had kept its factories in Michigan, Zaima said. "Looking in the crystal ball, Honduras is our bread and butter," Zaima said. "There's a role for Mexico. And China will work if you have the right part."

The real winner might be American workers' original outsourcing nemesis: Mexico.

Foreign-owned factories along the U.S.-Mexican border, which had declined five years ago, have bounced back. More than 1,160,000 people now are employed in 3,288 plants. "Manufacturing isn't just increasingly global," Zaima said, "it's increasingly dynamic."

Find original article here posted on the Detroit News site August 29, 2005. Edited by Bob

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