Obsolescence Insurance, a New High-Margin Business for EMS Companies
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It’s a barely noticeable trickle now but what if all the prodigal Western OEMs who shifted production en masse to low-cost locations in Asia suddenly move even a single-digit percentage of their manufacturing volume back home? Will the electronics supply chain be able to handle the flood and does the industry anymore have the intellectual capital to deal with volume production?
Of course nobody is saying anything like this is brewing but the best executives always prepare not just for likely and best-case scenarios but also for worst-case scenarios. A return (re-shoring as it’s often fancifully described) of a mere 10 percent of current Western manufacturing by OEMs across many industries will greatly test the supply chain and result in unimaginable problems for everyone.
That’s why the news that a handful of electronic OEMs are gingerly moving some production back to the United States should be on everyone’s radar. Apple, Motorola Mobility, General Electric, Whirlpool, Caterpillar and a handful of other U.S. companies want to make more of their products at home, moving these back from Far East (China, primarily) locations and sparking faint hopes of a resurgence in the local manufacturing industry. Great idea but let’s ask a practical question: What is the current state of the local components procurement and contract manufacturing service sector that would support this initiative?
If Apple, which wants to manufacture some of its personal computers in the U.S., and the other U.S. OEMs pull this off – and I have no doubts they can – all these companies should consider themselves indebted to the electronics supply chain’s incredibly flexible support services providers. These companies, including components distributors, logistics providers, contract manufacturers, product life cycle management application developers and other supply chain services vendors, made sure the system did not atrophy while the biggest OEMs were pulling up their manufacturing roots to take advantage of China’s lower labor costs. (See: In Shift of Jobs, Apple Will Make Some Macs in U.S.).
A manufacturing system must be regular greased to maintain its efficiency and while recent reports credit Apple, General Electric and Motorola Mobility with trying to revive local manufacturing in the U.S., the real story hasn’t been told yet. Small and mid-tier OEMs that either couldn’t relocate manufacturing to South East Asia or that believed the total-cost-of-ownership (TCO) wasn’t in their interest continued to produce equipment in Western plants over the last two decades despite deep skepticism about their chances. In doing so, they made it possible for the “prodigals” to have the opportunity of returning should they choose to.
The criticisms levelled against companies that stayed home – that they can’t compete against the “China Cost” haven’t quite gone away but it’s becoming apparent a one-region manufacturing system is myopic and self-destructive. Supply chain experts like Douglas Kent, former head of the Velocity business at Avnet Inc., have repeatedly argued that companies should examine their overall costs before moving production overseas. Many companies didn’t heed their cautionary warnings during the mad rush to transfer plants to China in the 1990s and in the first half of the last decade.
Today, China, while still very attractive to manufacturers, gets a thorough TCO review and sometimes loses to closer manufacturing locations such as Mexico when American companies are weighing options for production sites. This doesn’t mean the U.S. is going to start seeing a flood of production reversing back from China. I think it is a possibility but the flow won’t be enough to restore the millions of manufacturing jobs that have been lost but it does mean Western locations can still be viable production centers for the electronics industry contrary to what Steve Jobs, the late Apple CEO, reportedly told President Obama. (See: Apple’s Jobs to Obama: “jobs aren’t coming back” to U.S.).
What it does mean, though, is that there is still a vibrant supply chain support system and expertise in the U.S. and in other Western locations to support OEMs if they should opt for a re-shoring program. Returning OEMs may not get dirt cheap labor but the supply chain system they will get will be agile, flexible and definitely scalable.
For this, we can all thank the distributors, component suppliers, EMS providers and the logistics companies who followed customers overseas and still kept a toehold at home in anticipation of when the prodigals would return.
DISCLAIMER: BOLAJI OJO IS EDITOR-IN-CHIEF AND PUBLISHER OF ELECTRONICS PURCHASING STRATEGIES. THE VIEWS EXPRESSED IN THIS BLOG ARE THOSE OF THE AUTHOR ALONE WHO PROMISES TO BASE HIS SOMETIMES BIASED, POSSIBLY IGNORANT, OCCASIONALLY IRRELEVANT BUT ABSOLUTELY STIMULATING THOUGHTS ON THE SUBJECTIVE INTERPRETATION OF VERIFIABLE FACTS ALONE. ANY COMMENTS SHOULD BE SENT TO THE AUTHOR AT BOLAJI.OJO@EPSNEWSONLINE.COM.
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