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Manufacturing: Home Sweet Home?

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.

12 comments on “Manufacturing: Home Sweet Home?

  1. chipmonk
    May 4, 2012

    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.

  2. bolaji ojo
    May 4, 2012

    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?

  3. R.J.Matthews
    May 4, 2012

    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.

    http://www.hitechlegion.com/outside/daily/18615-workers-threaten-to-leap-off-roofs-at-foxconn-plant-in-china

    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.

    http://www.capacitorindustry.com/foxconn-outfoxed?utm_source=rss&utm_medium=rss&utm_campaign=foxconn-outfoxed

    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.

  4. R.J.Matthews
    May 5, 2012

    This on tuesday on bbc2 in the uk looks like it may provide some insights.

    http://www.radiotimes.com/episode/qkyyh/the-town-taking-on-china–series-1—episode-1

    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.

  5. _hm
    May 5, 2012

    Very encouraging news. I wished and expected so. However, unioins should be careful to handle this situation and look for bright future for all.

  6. Daniel
    May 8, 2012

    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.

  7. FLYINGSCOT
    May 8, 2012

    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.

  8. syedzunair
    May 8, 2012

    @Jacob:

    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. 

  9. Jay_Bond
    May 9, 2012

    @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.

  10. Daniel
    May 10, 2012

    Syedzunair, opening factories at different locations are not only for savings in tax and labour, there are many factors behind that. Eventhough it's an MNC, production at their place makes the people a native feelings. It's also better for the companies to know the in & out, guiding factor and requirements in market without depending a third party. More over they can buy the raw material from local market, using the available local skills etc can help them to sell the product at a competitive price.

  11. sharonstarr
    May 16, 2012

    All electronics manufacturers in the Americas are invited to participate in IPC's new study about the impact of on-shoring – the migration of electronics manufacturing operations back to the Americas from overseas.  Data from “On-Shoring in the Electronics Industry: Trends and Outlook will measure the impact on revenue and jobs, and explain the drivers and future outlook.  To take the survey by May 25, please go to http://www.ipc.org/on-shoring . The results of survey will be published in June. Companies that participate in the survey will receive the complete report of the findings for free.

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