With the world slowly emerging from the economic downturn, manufacturing hasn't just picked up. It has become a popular news topic, a focus of business conversation, and, perhaps most of all, a subject of debate in the halls of government.
The revival of manufacturing is viewed as a sign of hope and economic strength. Symbolically, it is a mark of national pride. Growth in manufacturing also translates to both real and perceived job growth. As the political conversation in the developed world has turned to repatriating manufacturing -- much of it high-tech manufacturing -- we took a quick supply chain view of what makes the "right" location to produce high-tech products. This turns out to be an interesting question.
As high-tech companies have joined forces with contract manufacturers to develop lower-cost, higher-scale manufacturing solutions, something interesting has happened. Contract manufacturers have become really good at manufacturing, particularly developing the processes and quality needed to manufacture high-tech products at scale cost effectively. The advantage of contract manufacturing is no longer a simple matter of labor arbitrage. In many ways, contract manufacturers have supplanted OEMs in their manufacturing prowess -- even to the extent of becoming strategic partners in product development.
Over the past few months, some notable high-tech executives have come under fire for suggesting that the ability to manufacture their products may have passed their home countries by. How could they suggest such a thing when manufacturing appears to be so crucial to the economic recovery? They probably say it because it is largely true. And it is not just a matter of cost. High-tech contract manufacturers and original design manufacturers have developed the capabilities required to build many products more efficiently and of a higher quality than most legacy OEM facilities.
Our experience with high-tech and aerospace clients indicates that, when measuring the total landed cost of manufactured goods (the soup-to-nuts costs of labor, inputs, transportation, taxes, etc.), manufacturing quality and efficiency makes higher-cost labor markets extremely competitive with lower-cost regions. As a result, it is not surprising that efficient, high-quality producers from the US to Mexico to Germany are increasingly winning the day.
Yet things are getting interesting. In large part, "Western" countries may no longer control high-tech manufacturing, but there is a reason to qualify the statement. Rising wages in China and elsewhere, coupled with the growing costs of transportation and fuel, regulation, and duties, challenge OEMs and contract manufacturers to develop a new formula for guiding their investments in manufacturing and site location.
If contract manufacturers' true differentiators are moving away from labor costs and toward rapid deployment, quality, scalability, and efficiency, are they necessarily wedded to a "low-cost" location strategy? As labor and other costs rise in China, Eastern Europe, and elsewhere, will contract manufacturers seek to increase their geographic mobility, knowing that their secret sauce is their ability to stand up, staff, and run high-quality manufacturing capacity flexibly? Could they even go as far as to bring some of that capacity "home"? Though that's unlikely to happen tomorrow, we may be getting closer to that point.
We may see ourselves entering a world in which the true difference is manufacturing acumen, not the cost of labor. As high-tech devices become more complex, compact, and capable, manufacturing design, planning, and execution will become more pivotal to OEMs' ability to realize value. Contract manufacturers may stay in the coastal regions of Asia and not seek to move to inland locations like Sichuan. They may consider more geographic diversity in their manufacturing footprint, creating regional centers of excellence. They may even bring their operations back into "high-cost" countries, much as automakers are doing in increasing numbers.
All this is possible because the story is no longer about labor. It's about the efficiency and quality of the contract manufacturing model.
Arrogant MBAs from the coasts with nothing more than an English major under their belt, arbitraging a strategic asset like manufacturing away to China and crippling America's future. The reason Germany or Japan thrives in manufacturing is because they do not have these viruses in their society.
Chipmonk, As usual, you give too much blames to one group and fail to accept we live in a universe where other regions want a piece of the pie too. In this case, you give zero credit to China for successfully positioning itself as a manufacturing zone.
Yes, Western companies transferred manufacturing but they moved their plants to a region that was ready. Germany is a manufacturing location but only for certain select products and Japan has plants in China too.
By the way, the "arrogant MBAs from the coasts with nothing more than an English major under their belt," are saying the West can be cost-competitive in manufacturing. Did you get that from the article?
Pretty simple manufacturing went to China and elsewhere because it was cheaper. Business just showed the same behaviour ninety nine percent of people do when they go shopping. Does your average shopper check where a product is made or just what's the best deal?
A lot of China's edge is down to them treating the workforce like serfs but I expect wages to rise as Chinese workers get tired of that and want a bigger piece of the pie themselves.
Workers at a Chinese factory owned by Foxconn, Apple Inc's main manufacturer, threatened to jump off the roof of a building in a protest over wages just a month after the two firms announced a landmark agreement on improving working conditions.
Foxconn has been hit hard by reports about its hiring and compensation practices in China. In recent months, the company has had to increase salaries for many of its workers (as much as 25 percent in some cases), and this has hit its margins hard. Foxconn is also being forced to hire thousands of workers while it adds plants in China's hinterland to keep costs down and reduce the psychological problems for employees working thousands of miles from home.
This two-part series is set up like a reality show: can a cushion factory in Merseyside challenge the might of Chinese manufacturing in three months? In fact it's an interesting real-life story: cushion king Tony Caldeira wants to expand his factory in Kirby and take on jobless youngsters; meanwhile his plant in China is struggling with a labour shortage. Is this a chance for British workers to show their mettle?
There are telling scenes: an open-air Chinese labour exchange with picky punters, a machinist in Kirby struggling to sew her cushions — and in the end it's a perfectly formed parable of life in the global economy.
About this programme
1/2. Two-part documentary following cushion manufacturer Tony Caldeira, who like many other businessmen makes his products in China, where costs and wages are cheap. However, with Chinese staff now demanding much higher pay, the executive embarks on an experiment to bring manufacturing back to Britain by opening a factory in Kirkby, near Liverpool. But he has a lot to do. While his new supervisor and machinist set to work training the recruits in the art of sewing, Tony tries to inspire them to commit to the company, despite the fact they are only earning the minimum wage. But when they start falling like dominoes, it becomes clear his dream is fading fast.
Bolaji, globalization is a general phenomenon in industrial world and it’s difficult for any country to take a stand alone position. MS/Intel/Ford cannot make any particular products for US (internal market) itself and may not be feasible for a long run. They are looking for business outside the country, so inorder to support these decisions they may start different factories at different locations. We cannot blame anybody for this because the main intention for any business is maximizing the profit. Minimizing the working capital and selecting the raw materials are the cheapest rate are the key factors.
You make an interesting point that the ability to manufacture high tech goods could be lost in the traditional Western countries. I had always believed that this would not be the case but if it is then Western companies should ensure they retain that capability for disaster recovery at least.
I agree with you that making products for the internal US market alone will not be feasible in this era of globalization. But I think that outsourcing - or putting up factories in different locations is primarily based on the cost savings you get by deploying cheap labor and lenient tax laws.
@Bolaji, you brought up some very good points. I have read many articles over the last couple months that are stressing how the US can bring manufacturing back stateside. We are already begining to see onshoring, and there is so much potential. Many of these articles on CNNMoney and other sites highlight how manufacturing is not dead.
US and European OEMs not only are reconsidering their offshoring, but in some cases are moving manufacturing back into or at least near their “home” markets.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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