Sourcing Metal Castings From China: The (Not-So-Secret) Hidden Costs

About 30% of US metal castings consumption was imported from China from 2011 to 2012. (We went into how the automotive industry should bolster castings demand for years to come in Part One here.)

Before that, China attracted most of the US-based metal castings end use industry with the attractive subsidies, tax regulations, cheap labor and currency advantage against US dollar. Beyond the declining exchange rate, inflation in China has raised the cost of Chinese parts. However, China’s inflation has exceeded US inflation consistently since 2007.

With the Chinese labor wages rising at about 17% per year and the value of China’s yuan (CNY) continuing to increase, the gap between US and Chinese labor wages is narrowing rapidly. The net labor costs for manufacturing in China are expected to converge with those in the US by around 2016. Beyond the above-mentioned factors, there exist hidden costs when sourcing from China.

Every manufacturer (who reads MetalMiner, anyway) should know these by now – here’s a bullet list:

  • Lead time
  • Quality controls
  • Technology at risk
  • Legal liabilities
  • Power shortages
  • Tooling failure
china's crumbling cost advantage for metal castings
Source: Beroe

Mexico – Ideal Manufacturing Hub for North America?

A big factor in the North American resurgence in addition to US economic recovery is Mexico.

Look no further than MetalMiner’s recent exclusive interview series with sourcing expert German Dominguez.

Mexico is the third-largest supplier of metal castings to the US after China and Canada. Exports to the US have grown in recent years at the expense of China. Mexican casting prices are now near parity with China castings prices.

Shorter lead times and closer proximity with an advantage of NAFTA work strongly in Mexico’s favor, as global automotive manufacturers map out their assembly investments in Mexico for Americas region for the rest of the decade. Considering the automotive industry in Mexico, output is expected to exceed 3 million units for the first time ever in 2014, as plants being built by Nissan, Mazda and Honda Motor Corp. go online.

In years to come, after Volkswagen Group opens its plant for the Audi brand, Mexico’s light vehicle output is expected to top 4 million units a year. This provokes the opportunity of Mexico’s metal casting industry players to expand their production and capability.

By 2020, Canada’s auto production is expected to drop by 20% while Mexico’s to rise more than 60%. Mexico’s cost advantages are likely to put downward pressure on automotive industry employment both in the US and Canada.

mexico auto production beroe
Source: ProMexico

FREE Download: 7 Metal Buying Strategies for 2014 (Base Metals, HRC, CRC)

Up Next: China’s labor wages/productivity, energy and raw material, and currency exchange.

MetalMiner welcomes guest contributor Suriya Anjumohan, senior research analyst with Beroe Inc., specializing in metal castings, forgings & stampings. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

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