It also should be noted that firms tend to cluster to take advantage of concentrations of skills, similar production processes, and specialized suppliers. Within the United States, there is Silicon Valley in California, the Research Triangle, in North Carolina, the High-Tech Community along Route 128 in Boston, financial services and transportation in Atlanta, and plastics and aerospace in Wichita, Kansas. The same is true for clusters of industries abroad, including financial services in London, medical research and development in Singapore, and fashion design in Paris. These centers seem to attract industries regardless of their relatively high cost of labor. Studies of such clusters indicate that the most important sources of prosperity can be created and are not dependent on “inherited” advantages, such as relative wage costs. 43
Still, the difference in labor costs between, for example, the United States and China ($23.82 per hour vs $0.67 in 2006) are striking. The level of wages, however, is not the only factor in determining where segments of the supply chain are located. Labor costs, for many products, account for a relatively small share of total manufacturing costs, and high wages can be offset by high productivity. However, the fracturing of the production process implies that the labor- intensive segment of a supply chain can be concentrated in a low-wage country. For example, fashion design may be centered in Paris, but garment assembly still may be done in lower wage locations.
Low wages, though, may not stay low. American businesses in China, for example, have found that once workers gain certain skills, there is so much competition for those workers that their wages are bid up by competitor companies. Also inflation rates, exchange rate appreciation, and rising shipping costs can offset some of the wage differential. When this is combined with political risk, product safety concerns, and other factors, the supply chain manager may not always choose the country with the lowest wages. For example, wages in Bangladesh may be even lower than those in China, but for a variety of reasons (e.g., low labor productivity, lack of supporting infrastructure, and shipping costs), Bangladesh has not become a major manufacturing platform for U.S. businesses.
A 2007 survey of U.S. companies in China indicated that a major shift in perceptions is occurring regarding China as a low-cost country. Companies there have been experiencing increases of 7% to 10% per year in costs for white collar management, support staff, blue-collar workers, and raw materials. More than half of the companies surveyed agreed or strongly agreed that India, Thailand, and Vietnam are challenging China’s position as the leading low-cost export platform. In the survey, the leading reason for establishing manufacturing bases in China was access to the local market with labor costs savings second and access to the Asian market third. 44
Those who oppose moving segments of supply chains from the United States to foreign countries where labor costs are lower generally raise issues such as lower labor standards and working conditions abroad.45 In cases, they have put pressure on the U.S. headquarters of the supply chain
43 Michael E. Porter, "Clusters of Innovation, Regional Foundations of U.S. Competitiveness," Council on Competitiveness and the Monitor Group, October 2001, pp. 5-7.
44 Booz Allen Hamilton, China Manufacturing Competitiveness, 2007-2008 (Shanghai: American Chamber of Commerce in Shanghai, 2008), pp. 4, 13.
45 The AFL-CIO, for example advocates the reform of trade rules to hold companies accountable for respecting workers’ rights no matter where they produce and calls for the international community to recognize strong workers’ (continued...)