Globalization Reset

As has been oft noted, the electronics industry is cyclical in nature. Companies both up and down the supply chain wrestle with this fact daily and, in general, have done a pretty good job.

During the global economic meltdown, demand suddenly fell off a cliff rather than modulating through another of its endless cycles. This led to about six quarters of retrenchment, which has continued to cause disruptions in the supply chain due to imbalances. Perhaps it is a good time to take a 30,000-foot view of the industry and consider a potential course correction for a practice that continues to make procurement a far more complicated task than need be.

In olden days, companies like Motorola Inc. (NYSE: MOT) began committing to the transfer of huge portions of their supply requirements (like cellphone manufacturing) to geographically remote regions like China. The argument was that by investing in manufacturing and supply chain creation in a largely undeveloped country where labor costs would be lower than in the US (and by being an early entrant) Motorola would capture the local market share when Chinese people started buying phones. Obviously, the end result proved to be something very different. Motorola is suing former employees and Huawei for IP theft, and its cellphone division is dust.

Concurrent with this globalization trend was the outsourced model, where many manufacturers, both big companies and small, in nearly every end-market segment, started shifting their manufacturing operations to another entity -- the electronics manufacturing services supplier. The trend began with high-volume, low-mix products but eventually came to encompass low-volume, high-mix products like medical and defense/aerospace electronics.

Interestingly, neither of these trends actually originated in the board rooms of the electronics industry, but rather grew to fruition on the trading desks of Wall Street. While they may have made sense to the financial community in theory, unfortunately they made no sense to business in practice. Building electronic products is not like making tennis shoes.

Nonetheless, once the global fever took hold, CEOs throughout the electronics industry were pressured to have an overseas presence. One geography after another was opened for business as the industry chased low labor rates around the globe. Here at Charlie Barnhart & Associates LLC (CBA) we now track more than 28 geographies, a situation clearly spinning out of control. We will be publishing a report next week to our Outsourcing Navigator Council members that profiles 18 more. Even worse, the number of failed supply cases has increased along with geographic expansion. This incongruent convergence of “external & remote” (think ER, as in emergency room!) has brought us to a point where we are now advising 100 percent of our clients to reconsider a regional manufacturing strategy. The objective being threefold:

1. Regaining control over the supply chain
2. Facilitation of responsiveness to demand shifts
3. Reducing carbon footprint

Additionally, we would argue that such strategies as lean manufacturing, while extremely productive and important tools, are impractical in a regionally remote manufacturing model where products are made in one region but sold in another. By way of example, look at what Toyota did in North America, where it didn’t attempt to build an auto market from zero (as Motorola did with cellphones in China) but rather localized manufacturing in support of an already healthy demand for its products within the region.

A regional strategy will also help the electronics industry rise from the ashes of this global economic meltdown, as bringing manufacturing geographically closer to design enables innovation. You can argue against this reality forever but the bottom line is that proximity matters, an indisputable if inconvenient truth. Further, OEMs who invest in nurturing a relationship with their regional manufacturing services supplier can recreate this access to historically advantageous insight by levering the vertical model while eliminating most of the expense.

The electronics revolution has created undreamed-of potential for connecting individuals to information and empowering them to use that information to their advantage. It has enabled a global community, for good or ill. Having been observers of the industry for several decades, we're confident the next wave of innovation in areas such as robotics, energy, medicine, and information technology will bring even more useful products to markets around the world -- but it’s time to revisit the question of where we’re planning on building them and why we’ve elected to do it that way.