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Manufacturing Renaissance: For Show or For Real?
March 13, 2013 |Estimated reading time: 7 minutes
Editor's Note: This column originally appeared in the February 2013 issue of SMT Magazine.Apple’s recent announcement that they’ll be bringing back some manufacturing to the U.S. made headlines around the world. Market experts were quick to point out that the iMac mentioned by Apple CEO Tim Cook represents a very small piece of Apple’s product portfolio and not a heck of a lot of volume. Although the comments by Cook caused quite a stir, it wasn’t unexpected. Companies like Apple will do the right thing for their businesses. The decision was probably made to reduce shipping costs since some of the heaviest components (like the glass) are already made here, in the U.S. And, I suspect that most iMacs are sold here in the U.S., as well. I’m certain that whatever they do here in the States will likely be highly automated, making labor costs a non-issue. They’ll probably save money on the deal so it’s not an altruistic, support-American-jobs endeavor. Nor should it be.
Steve Jobs’ famous comments to President Obama that the types of jobs created by assembly of the iPhones, iPads, iPods, etc., are never coming back is spot-on (although “never” is a long time). They won’t come back and we don’t want them. They aren’t good for the economy or for American workers. If this type of manufacturing does return to North America we’ll see factories filled with Foxconn’s robots building them. And, as we’ve read over the last year or so, that will happen even in low-cost regions. Automation will be the great geographic playing-field leveler. It’s going to remove labor from the equation.
Geography, Oil, and the Fukushima Effect
With labor becoming less and less of an issue, it’s going to ultimately come down to the cost of moving components and then the final product to the assembly locations and end-markets. As factories around the world continue to drive the cost of labor out of their products, the location of final product assembly will ultimately come down to the cost and time associated with shipping. As supply chains relocate to support their OEM/EMS customers and to diversify their operations to avert the effects of disasters like Fukushima and the floods in Thailand, both of which disrupted the global supply chain, the supply base’s location won’t be a huge issue since all facets will be represented in all major geographical regions.
Flextronics CEO Mike McNamara said this recently about onshoring: “I think, moving production back to the U.S. is a process, or it is a journey, almost. As our costs become pressured, it makes other choices more interesting. So, what that is going to do is probably push more work into Mexico. And, over time, as those costs continue to go up, you'll probably see more things get pushed back into the USA.”
IPC’s recent report about EMS companies returning to North America echoed McNamara’s comments, mostly. The comments aren’t reflective of some great renaissance of buy or build American; it’s really just the markets doing their stuff. As the vacuum created by China fills (extremely low wages, costs and currency exchange rates giving way to normalized manufacturing costs), markets will tend to seek out balance. That balance is simply the market’s way of leveling out and finding the lowest overall costs. For instance, much of the manufacturing in China will, more and more, service the Chinese and regional Asian markets just as European manufacturing will mostly serve the European market. The need for more secure, diversified supply chains will help move this along. Still, in regional markets, as we’re seeing, manufacturing will flow into the lowest cost areas, i.e., Mexico for North America, Eastern Europe for Europe, South Asian countries for Asia, etc. The nice thing about being a global EMS provider is that they can turn on or off manufacturing as needed to take advantage of logistical or geographic opportunities to support their customers.
More Markets
As countries develop, they become targets for low-cost, regional manufacturing. The development of these markets creates many more consumers for the products we build. Just think about it. If we hadn’t had the Chinese entry into the market in such a big way, there would be hundreds of millions of fewer consumers for electronic products. From Boeing, which predicts the need for 34,000 (not a typo) new planes over the next 20 years (7,400 in N.A. and the rest overseas) to Apple, sales would be dramatically less, leaving far fewer good paying jobs in the U.S. The World Bank said this about China’s progress:
China’s dramatic progress in reducing poverty over the past three decades is well known. More than 600 million people were lifted out of poverty as China’s poverty rate fell from 84% in 1981 to 13% in 2008, as measured by the percentage of people living on the equivalent of US $1.25 or less per day, in 2005 purchasing price parity terms.
Those 600 million consumers are having quite an impact on the global economy and on the economy of the United States and Europe. And, China is lifting most of Asia. I thought these comments, again, from the same World Bank report, were quite interesting:
Rapid economic ascendance has brought on many challenges as well, including high inequality; rapid urbanization; challenges to environmental sustainability; and external imbalances. China also faces demographic pressures related to an aging population and the internal migration of labor.
Significant policy adjustments are required in order for China’s growth to be sustainable. Experience shows that transitioning from middle-income to high-income status can be more difficult than moving up from low to middle income.
Now, think beyond China. South Asia’s countries have a population of about one billion and India has another billion. Those 2 billion people along with China’s billion+ represent quite a few consumers for the sophisticated goods coming out of the developed world. The more cell phones they buy, the more cell towers and communications infrastructure they’ll need along with medical services, banking, cars, computers, and more.
Another article in MIT’s Technology Review, “Manufacturing in the Balance,” talks about the future of manufacturing belonging to technology, leaving the decade of inexpensive labor behind. The article starts out with GE’s expansion of their appliance manufacturing facility in Kentucky last year and repatriating their manufacturing from China and South Korea. GE’s CEO Jeffrey Immelt addresses the major driver for their decision: “At a time when speed to market is everything, separating design and development from manufacturing didn’t make sense. Outsourcing based only on labor costs is yesterday’s model.”
What blows me away is that a company the size of GE didn’t get this until now. Hell, I could be their CEO. I wouldn’t have made that mistake. Before shifting manufacturing to China I certainly would have carefully considered all my costs of product development and manufacturing.
We don’t have to bring anything back to the U.S. It will come on its own, when it makes the most sense or when these companies come to their senses. It really never made sense to send most of our manufacturing to China. There were scores of articles over the last decade by very competent groups trying to open the eyes of those rushing to China. Sure, for some products China was no-brainer, but for many others they weren’t the lowest cost producer. Now, we’re seeing more and more companies figuring that out.
I do believe that the longer low-cost manufacturing stays overseas and helps developing countries, employing future consumers, pulling people out of poverty, the better it is, ultimately, for us all. Leave the stuff that makes sense in those countries and bring the rest back.
I know not everyone agrees with me on this, but if you’re thinking short-term you’ll miss the tremendous opportunity this affords the developed world. Look at the big picture, and position your business accordingly. If you don’t, you’ll spend most of your time complaining about low-cost competition instead of reaping the rewards of an expanding global market.
Ray Rasmussen is the publisher and chief editor for I-Connect007 publications. He has worked in the industry since 1978 and is the former publisher and chief editor of CircuiTree Magazine. Contact Rasmussen here.