Foxconn Is Coming to America: Has Offshoring Peaked?

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The electronics industry has never known a contract manufacturer like Foxconn Technology Co. (TPE: 2354). It emerged seemingly out of nowhere, grew into a $132 billion behemoth and altered the market’s geographic makeup by facilitating the massive shift of production to China. Now, the EMS provider wants to set up plants in the United States, reversing the offshoring trends of the last 20 years, and helping to redraw the manufacturing landscape. Does this shift make sense and what will it mean for Foxconn, competitors and the entire electronics industry?

Tai-min (Terry) Gou, Foxconn’s founder, chairman and president, told employees during a recent meeting that the company plans to increase production in the United States and other locations outside of China. The plan, if carried out and copied by other mega contract manufacturers, will alter the electronics supply chain, rejuvenating the North American operations of some companies – especially component suppliers, distributors and specialized EMS providers – and forcing small and mid-tier OEMs planning to transfer or outsource production to Asia to rethink their decisions.

Total Cost of Ownership (TCO), a management metric executives at bellwether companies have been stressing with limited initial impact for years, appears to have won out over the expediency of short-term improvements in operating margins and other cost-trimming objectives. Today, concerns about geo-political problems in remote production centers, natural disasters and the long-tail of logistics – shipping or airfreight – keep industry executives tethered to their phones, making alternate plans to get products to end-users on time and at the optimum price. Recent events have also made it clear to many manufacturing executives that gains from lower production costs in China or elsewhere can be quickly wiped off by other problems if products don’t make it to markets on time, according to observers.

“Locating manufacturing close to demand makes it easier to identify and meet local needs,” said McKinsey & Co. analysts Katy George, Sree Ramaswamy and Lou Rassey in a recent report. “It’s a delicate balancing act, though, to create an efficient global manufacturing footprint that embraces a wide range of local tastes, since economies of scale still matter in many industries.”

The McKinsey analysts called what they see developing in the manufacturing arena “Next-shoring”, which they say “emphasizes proximity to demand and proximity to innovation.” The researchers said they believe next-shoring will add to the complexity of the manufacturing ecosystem but insist it is the next stage companies must embrace to be competitive.

“[Demand and proximity to innovation] are crucial in a world where evolving demand from new markets places a premium on the ability to adapt products to different regions and where emerging technologies that could disrupt costs and processes are making new supply ecosystems a differentiator,” they added. “Next-shoring strategies encompass elements such as a diverse and agile set of production locations, a rich network of innovation-oriented partnerships, and a strong focus on technical skills.”

In the video clip below, George, a director at McKinsey explains the factors behind next-shoring:

Foxconn’s decision to establish factories in the United States grew out of the unfolding reality that OEM customers want greater guarantees than it can currently offer. The decision itself wasn’t totally unexpected since industry observers have said they’ve noticed growing evidence some manufacturers have moved some production back to Western plants or were delaying such transfers to the Far East. Coming from a company that has become almost synonymous with Western outsourcing/offshoring, though, the announcement still represents a sharp reversal of a trend that resulted in the massive transfer of production from Western locations to lower-cost Eastern European and Far East sites.

Even now, nobody expects Foxconn, also known as Hon Hai Precision Industry Co. Ltd. (TPE: 2317), to transfer huge production volumes out of China into the U.S. However, the shifting of even a fraction of production to the West would confirm the suspicion that the offshoring era may have peaked, a fact some industry observers have been pointing out. It would also mean the electronics industry and other manufacturing sectors will experience further supply chain disruptions as companies ponder which plants and support systems to leave in certain regions and what to dismantle and reassemble elsewhere.

Foxconn is not looking to set a new goal for the industry or reform the manufacturing environment. Neither does it want to make a statement in favor of local production. It just wants to keep making money, increase sales and support the growing requirement from OEM customers for production facilities in the United States, close to end-equipment buyers. The company is projecting sales will exceed $300 billion within the next 10 years but, like many such headlines-grabbing numbers, the reality for Foxconn may be vastly different from what it expects.