Manufacturing Trending Away from China

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Over the past two decades, there has been a massive shift of manufacturing to China, especially for high-volume, low-mix electronic products. But in recent years, there has been a counter trend away from China. Some of the promise of manufacturing in China has worn off. Labor costs are rising. Energy prices have increased the cost of shipping. Many companies have experienced poor service and product recall due to faulty manufacturing. And counterfeiting has dimmed the promise of selling into China's massive consumer market.
Consequently,[link widoczny dla zalogowanych], many OEMs are rethinking their manufacturing plans and eyeing other areas of the world from Eastern Europe to Mexico and Latin America. "We've seen a flurry of people jumping on the bandwagon to move from China," said Charlie Barnhart, co-founder and managing principal at Charlie Barnhart and Associates LLC, a Maui-based company that studies outsourcing. "The trend started in 2006 as people started to see that Mexico was cheaper than China."
Barnhart noted that Mexico is less expensive when you factor in all of the variables, from shipping and rising labor costs to procurement difficulties and problems with the manufacturing itself. Barnhart also noted that many OEMs are finding the most efficient location for outsourcing is near the end markets. "The cheapest and most effective outsourcing is building in the region for the region," he said. "Each region has a low-cost solution �C Mexico for the Americas and East Europe for Europe."
Proximity to markets and stable supply
The idea of shifting manufacturing close to consumers is getting traction among OEMs. "Proximity to end markets is important," said Adam Pick, director and principal of EMS/OEM at iSuppli Corp in El Segundo, Calif. "Going into the seasonally hot third and fourth quarters, being able to do quick turn orders makes a difference if you're close to your end market."
For a growing number of OEMs, proximity to the end customer have become the overriding concern in outsourcing. "I talk with customers about where they're going to outsource and the number-once consideration is ��Where is my customer?'" said Chuck Delph, senior VP of sales at Avnet Electronics Marketing Americas, a division of Avnet Inc in Phoenix. "Cost is a factor, but stable supply and being close to the customers is becoming more important."
Recently, problems with China's electronics supply chain have caused the jitters among OEMs. "China has a fragile supply chain. During this economic downturn, thousands of companies have gone out of business in China," said Barnhart. "Companies call their suppliers to see what's going on and nobody answers the phone."
The proximity to end markets becomes particularly important with larger products. "Being close to the customer makes a lot of sense, and when you're talking about big products,[link widoczny dla zalogowanych], it really makes a different,[link widoczny dla zalogowanych]," said DJ Hill, CEO of Silicon Border, a San Diego-based company that is developing 10,000 acres in northern Mexico for electronics plants. "Now, the biggest manufacturing of TVs is in Baja California. The big box guys are looking for sites on the Mexican border because it can cut three days from the cycle time in delivering their product."
Costs and wages are rising in China
One of the recent challenges for China manufacturing is the rising cost. Labor has gone up and energy prices have make shipping more expensive. "A low-volume OEM decided to go to China because they were gung ho on the low margin,[link widoczny dla zalogowanych], but two years onto the program, the gross-margin attraction turned out not to be real," said Pick of iSuppli. "There were incremental costs and poor service. Plus, the OEM had to send its engineering team on the plane six times to support the manufacturing."
Low wages was one of the original attractions in China. But over the years, China has boomed and with the boom, wages have escalated. "China has a plan. They're driving up wages over time,[link widoczny dla zalogowanych]," said Hill. He noted unions are beginning to gain strength in China. In 2008, the Chinese parliament passed pro-labor legislation. A high-profile government campaign aims to set up unions in more than 10,000 workplaces and cover 80% of the larges foreign companies operating in China. "Can you imagine the fear that puts in the electronics guys when China starts talking about unions?" said Hill.
IP leakage
Many companies had a secondary motive for going to China �C they wanted to sell to the sleeping giant with billions of potential consumers. But that promise hasn't panned out. As wages increased in China, those billions of consumers were certainly eager to buy electronics products, but in many cases, they bought knock-offs produced by an army of counterfeiters. "There is definitely some resistance to China outsourcing because IP [intellectual property] tends to leak," said Pick. "There are some OEMs who would never go to China because of this."
The stories of IP stealing has soured many OEMs on outsourcing in China. "People are worried about their technology," said Hill. "People in Silicon Valley and Dallas are saying ��I'm losing my technology over there.'"
The problem with IP as circumvented the promise of selling to the giant consumer population in Asia. "A lot of people rationalized going to China to sell to China, but they were not able to penetrate the market," said Barnhart of Charlie Barnhart and Associates. "Those sales didn't show up in their financial pages. Why isn't China half of their market? It's because their products were knocked off."
US manufacturing is looking attractive
A number of major manufacturers have rediscovered the United States as a perfectly good place to manufacture products. While high labor costs and federal taxation drive up costs, local incentives can woo OEMs. GlobalFoundaries, a Sunnyvale, Calif-based foundry spin-off of AMD, recently broke ground on a $4.2 billion chip plant in Malta, NY. New York State anted upped $1.2 billion to land the plant. Dallas-based Texas Instruments Inc will soon open a new Richardson, Texas, chip plant with a $1 billion analog chip capacity, the first facility designed to use 12-inch wafers. Part of the enticement included $300 million funding to university entities to bolster engineering support.
Even with the problems associated with manufacturing in China, some manufacturers have captured the benefits and swear by China's advantages. "Some OEMs are still pounding the table about the benefits of China," said Pick. "They say, ��Yes it was hard, but the result was astounding.'" China works if the manufacturing is high volume and the bugs are worked out in the manufacturing process.
But for many OEMs China has become costly and risky, and the whole notion of outsourcing has come into question. "I spent 25 years in the outsourcing industry, but I'm not a huge proponent," said Barnhart. "It's like dynamite. Treat it without care and it will kill you."