Over There?

The blog has returned from its summer holiday a bit more tan, somewhat slimmer, and ready to put its goggles on and dive back into the high-tech supply chain. Yet somewhere between selecting the right hydrodynamic swimsuit and testing the water temperature, we paused in the face of some activity — dare we say trends — that appeared to fly in the face of the contemporary supply chain orthodoxy.

What heresy would come between us and a new Speedo? OEMs are considering what role China should play in the high-tech supply chain.

Tossing hyperbole to the wind, there is a foundational shift occurring in the high-tech OEM community. Offshoring is out. Right-shoring, as we discussed in a post back in November, is in. 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.

Let’s look a bit more closely at China. For starters, it is unlikely to take another 200-year hiatus from the international scene anytime soon. It is here to stay. But the economic growth fueling that permanence is generating some serious questions for those seeking to optimize the landed cost of supply chains serving US and European markets.

As high-tech OEMs look at total landed costs to guide their investments and physical network decisions, the question of what to do in China becomes more complex. As they look through the lenses of transportation, taxation, labor, components, raw materials, and other factors, there are two strategies to consider — manufacturing for local or regional demand in Asia, and manufacturing for external markets in faraway places.

China’s success has spurred domestic demand and given rise to an increasingly strong in-country market, particularly in coastal areas that were originally sources of “low-cost” manufacturing. Chinese manufacturing for the emergent Chinese consumer class makes sense; indeed, it may be an imperative. Chinese manufacturing for external markets is a more complex decision.

A narrow perspective on direct manufacturing and labor costs by some exporters has led to a westward shift in high-tech manufacturing away from the original coastal bases in the Pearl River Delta and Shanghai. Yet the opening of facilities in Chongqing, Sichuan, and elsewhere raises questions about the total landed cost and the relative advantage of these facilities for export to North America and Europe. With longer distance and less infrastructure between these new locations and the primary ports and gateways out of the country, OEMs must weigh the potential financial and service costs of such a move.

We could also look at Vietnam, Thailand, or even Mexico through this lens, but for now we’ll stick with China.

Fuel, tax, and freight costs may balance or outweigh any incremental labor savings achieved by moving inland. Fuel and freight are of particular concern, not just for outbound shipments, but also for bringing components into more distant manufacturing locations. As much as financial cost inputs matter, the possible customer service and delivery impacts of moving inland may be even greater.

The days, even weeks, of additional lead time generated by shifting manufacturing away from coastal regions pose a challenge to all manufacturers, particularly high-tech ones. Given the short life cycles of high-tech products, an additional five to seven days of lead time could take another 5 percent or more of a product’s planned life cycle out of the reach of revenue generation. It lengthens time to market, and we can’t forget the impact of depreciation. Longer lead times also make it harder to meet the stringent delivery requirements of high-tech retailers. Perhaps most worrisome is that increased distance reduces an OEM’s ability to respond to the ever-quickening changes in customer sentiment and taste.

Of course, China will not be rendered irrelevant for high-tech manufacturers. Indeed, the prospects for serving burgeoning domestic demand are quite bright. Yet China’s role in serving overseas markets may shift as the total landed cost of moving inland outweighs the incremental labor savings of doing so. Alternate solutions, such as Foxconn’s plan to use more automation, may emerge, but high-tech OEMs will need to pay even more attention to how manufacturing decisions impact the delicate balance between cost and service.

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