|Philip Stoten is an internationally recognized EMS industry expert. Known for his skills as an interviewer, reporter and panel moderator, Philip will be a featured multi-media contributor to U.S. Tech on a regular basis. We welcome him.
As we end 2013 and move into 2014 it's worth taking a look at what drives the selection of electronic manufacturing geography and perhaps more importantly what is driving those developments.
In the 1990s and the early 2000s, it seemed the only driver was cost of labor, largely drawing the industry east towards Asia and more specifically China. During this time we were also all looking for "China in our own backyard", leading to investment in manufacturing in Central America, predominantly Mexico for the USA and Eastern European countries like Poland, Romania and Hungary for the consumer market of Western Europe.
Outsourcing fueled the move to Asia as global EMS companies built facilities there and local EMS and ODM companies grew in influence and size. Many plants closed in Europe as OEMs outsourced to Asia and others simply moved their manufacturing in its entirety.
Meanwhile Mexico's growth stuttered amidst issues around crime, safety and political stability. Eastern Europe suffered from inferior infrastructure, investment and supply chain support.
As China grew through the 1990s and 2000s as the world's factory, the nation's middle-class grew too and the region began to become significant as a consumer nation too. The industry began to polarize with high volume manufacturing focusing in China and lower volume high mix work remaining in Europe and the US.
The Seeds of Change
However, things seem to be changing and over the past few years we have started to talk about re-shoring, hearing phrases like mass customization, proximity to customer, direct fulfillment and most recently Industry 4.0; all are reasons for a more evenly distributed manufacturing footprint. And while this was happening, new regions like Russia (and its former soviet states like the Ukraine), Brazil and India have gained publicity as consumer markets and potential manufacturing bases.
So, are we close to a perfect storm and what is the likely outcome? For me there are a number of issues to consider:
- The first is that of re-shoring. While campaigns like "Made in USA" are interesting and the sentiment is fine, it seems the more likely winners of re-shoring, or as I prefer right-shoring, will be Central America not North America, and Eastern, not Western Europe. I prefer the term right-shoring because as supply chains gets smarter, the ideal of designing a supply chain and manufacturing footprint to suit the product and the market is growing in favor. This more intellectual approach plays particularly well for suppliers who can offer greater choice in their own footprint.
- The second element worth considering: the habits of the consumer that lead to a desire for mass customization and in turn for direct fulfillment. We are already seeing examples of mass customization such as the Flextronics Moto X plant in Texas that serves US consumers with a very short time to market mass-produced but customized product. The first smart phone to be built in the US is more likely a result of consumer habits than of a successful "Made in America" program.
The Real Cost of Labor
- Next we need to consider labor rates. Two dynamics are at play here: first, wages are constantly becoming a smaller proportion of the cost of any electronic item; the other is the clear challenge presented by wage inflation in China. While salaries have been rising at close to 20 percent per year in China, they have been rising at much slower rates elsewhere bringing almost parity with Mexico and some Eastern European countries like Poland or Romania.
- Finally we should consider where the end users of the products are. It is clearly not just about the huge consumer regions of North America and Western Europe, although they are still very significant. Nations like Brazil, with their tariffs, have influenced the decision of manufacturers to invest either locally or in Central America where more favorable trade agreements are expected.
So, what does it all mean in 2014?
Clearly China will maintain its lead position, not just because it is great value, but also because the supply chain in China is so very well developed. And while the salary issue is significant, there is still plenty of China where salaries are still very low, particularly away from the coastal regions of Shanghai and Shenzhen.
Mexico can expect a good year growing in importance, as it seems to have ironed out most, if not all of the issues it has had and offers as a reliable region with steady and sustainably low costs. This is also perhaps true of Eastern Europe, particularly as countries like Romania and Bulgaria play a larger part in the EU. We have already heard news of lines being moved from China to Mexico.
Overall, a more rational approach to the supply chain and the footprint makes sense. This should lead to a more evenly spread manufacturing base in lower and higher cost environment focusing much more on the product, where it is needed, and how it needs to be fulfilled.