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Case Question: Deciding Where to Manufacture: The Role of Labor Costs According to Mike McNamara, chief executive officer (CEO) of Singapore-based Flextronics International, the case for manufacturing electronic parts in the United States is getting easier to make. Flextronics is second in size only to Hon Hai Precision Industry (Foxconn) in providing logistics, design, and manufacturing services for companies. (Flextronics, for example, makes phones for Motorola. Foxconn does much of the manufacturing for Apple.) Flextronics currently has roughly three-quarters of its manufacturing in low-cost countries such as China. But McNamara notes that wage costs have been rising around 20% a year in China and he expects that trend to continue for the forseeable future. He says that labor costs for Flextronics have risen even faster in some other countries (e.g., Malaysia and Indonesia). In contrast, wage growth in the United States has been flat. To be sure, China, with an average manufacturing wage and benefit cost of roughly $2/hour, still has a large advantage over the United States, where the average manufacturing wage and benefit cost is $36/hour. But this labor cost advantage of manufacturing in low-wage countries like China is slowly being reduced by its rapid wage growth. Also, for products where labor costs are a small share of total costs, labor cost is a less central decision factor. Another important trend is for companies to manufacture goods closer to where the customer is to reduce transportation and inventory costs and to allow companies to get products in customers' hands more quickly. Being close to customers also helps in better assessing and responding to changes in customer demand. For those companies primarily interested in lower labor costs than now found in China and/or reducing dependence on production in any single country like China, attractive options include countries like Cambodia, India, Indonesia, Malaysia, the Philippines, and Vietnam. Coach, which produces purses and accessories, is an example of a company that has done this, reducing its share of overall production from 80% in China to about 50% by 2015. Similarly, Clogs maker Crocs has reduced its production in China from 80% to 65%. But others will move some of their production to where their customers are, especially if the wage difference is less than in the past. Flextronics has about 4 million (of its 27 million total) square feet of manufacturing capacity in the United States. Mr. McNamara says Flextronics has spent about $10 million to improve its manufacturing facilities in Silicon Valley and that it may develop an additional 1 million in new U.S. manufacturing facilities over the next five years. Apple recently announced that it would begin producing a small number of Mac computers in the United States. Lenovo, based in China, also recently announced that it would set up a personal computer manufacturing plant in the United States. Volkswagen recently opened its first manufacturing plant in the United States (Tennessee), and Honda, Subaru, and Mitsubishi have recently expanded their U.S. capacity. Audi, Honda, Mazda, and Nissan will open new plants in Mexico in the next year or two, and BMW will follow them soon thereafter. Mexico, while having labor costs ($6.48/hour) higher than in countries like China, has significantly lower labor costs than in the United States, while being close to the U.S. and broader North American market. Production in North America also provides a hedge against currency exchange fluctuations.

Question 1.What types of changes have companies chapter made to their pay structures to support execution of their business strategies?

iv. effective alternative strategies which the company could implement in order to address each of the problems outlined above.

Note: Please answer question 1 IV only These questions are related to compensation management. There is no word limit so feel free to use as many words you are comfortable with thank you.

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