Making it abroad

Until the United States and China re-established diplomatic relations in 1979, the place to look for local knowledge about China would have been at the US Embassy in Warsaw, Poland. This was the only place to which both countries had accredited missions, and was for many years the only place where the Chinese and American governments held meetings. Now trading relations are positively thriving, but a scintilla of suspicion remains. We are only slowly recovering from the fear that China would replace the Soviet Union as a monolithic and hostile power and even today the size of its population, not to mention its consumption of resources, make western governments wary. 

China cannot be ignored, and in a decade it’s grown into something of a world outsourcing theme park, but it’s not as low cost as it used to be. There are a thousand excellent reasons for resisting the temptation to move manufacturing to low-cost economies, whether in China, other Asian countries, Eastern Europe, Brazil or Mexico. We may be happy with the idea that we make less and less of what we consume but some say we are losing skills too fast. 

For good or bad, the US has been less likely than other industrialized countries like Britain, Germany or Japan, to institute a national industrial policy. We have been the world’s leading advocate of free-market solutions. According to its senior director of media relations Darren McKinney, the National Association of Manufacturers (NAM) would love to keep American jobs in America. But the economic realities being what they are, a growing number of US manufacturers have come independently to the conclusion that to stay alive and competitive they have no alternative to going offshore. 

The argument goes like this: 90 percent of what we will buy or use in 10 years’ time hasn’t been invented yet. Our job is to get smarter at developing new product and figuring out new ways to manufacture it. We should invest in our laboratories and design workshops, train our graduates to work in them, but leave the messy business of series production to the people who are happy to do it for us. 

There’s a political trade off to this too, McKinney points out, as prosperity shifts the focus of whole populations from the pursuit of freedom to the pursuit of happiness: “The more advanced India, Korea and China become, theoretically the more peaceful and democratic the world becomes and the more hospitable to international trade.” 

That said, there are a number of things policy makers can and should do here in the US, says McKinney, to fix things that drive manufacturers offshore. “Manufacturers in the US pay more for natural gas than anywhere else in the world – about 10 times as much as a manufacturer in Indonesia. Litigation is a real problem – claimants using what we might call cutting edge legal strategies are costing manufacturers billions every year, and that doesn’t happen in China – or even the European Union.” 

There are a variety of self-imposed costs here in the US, NAM believes, which is why it is daily lobbying the administration and Congress to reduce these burdens and encourage manufacturers to invest in the people and communities of this country. 
Still, if it uses labor it will never again be as cheap to produce in the US as in Hunan or Bangkok. Steve Ganster and Kent Kedl in their recent book The China Ready Company argue that every company in the west needs to have a ”China strategy”, whether or not it plans to do business there. “It used to be the case that we had such a huge market here in the US that we could afford to ignore China,” Kedl says, “But that’s not the way it is today. We wrote our book for small to medium-sized companies that are following the offshore route that the big corporations went down in the 1990s.” The company he and Steve Ganster run, Technomic Asia, has helped Fortune 500 companies to locate in China for 20 years. Now it fields enquiries from smaller manufacturers, but many of them are unprepared, Kedl says. 

The first thing is to determine your motivation, Kedl insists. Ganster and he identified five basic motivations, of which a frequent one for the smaller company is being pulled. “If you are a second- or third-tier supplier to a large company that says you have to do this or they can’t work with you, that is one strong motivation.” But US manufacturers do not have as much experience of working cross culturally as do Europeans, and it can be challenging if China is your first international experience. It is a tough place to learn to ride a bicycle, as Kedl puts it. 

Many American manufacturers learned to ride this particular bicycle closer to home, in Mexico. Dale Robertson’s company Made in Mexico advises West Coast high-tech companies who want the advantage of having their product assembled by maquiladoras in Tijuana using components shipped from Asia. The logistics work, and it is an ideal location for EMS (electronic manufacturing services), with a long-established skill base in the industry. “The companies taking an interest in Mexico since China started gobbling up the high labor intensive operations are ones that want to protect their IP and guard their assembly techniques, and don’t want to create a competitor over there,” says Robertson. “Manufacturing in China is getting more expensive, and we are seeing a number of companies moving back.” Mexico appears to be gaining favor for certain kinds of work where proximity to the North American markets is important. 

According to Robert Freid, president of Contract Manufacturing Consultants (CMC) of Seattle, Mexico is growing on its own merits, not because OEMs are pulling back from Asia. "Mexico is now taking on more of the mid-volume requirements, but also increasingly, requirements for higher technology that they didn't do before," said Freid. His definition of high technology combines PCB assembly complexity and test complexity, and he sees Mexico climbing the technology ladder. "They're not at the highest end, but they're certainly well into the middle level and moving into the upper areas now." 

Mexico's proximity for system integration work isn't the only thing working in its favor. Based on conversations with large EMS companies in Mexico, Freid reports that at least two major players are relocating PCBA technology centers to Mexico. The fact that these centers are being moved to Mexico "is strong evidence as to where the future will lie for printed circuit board assembly in North America," he says. 

Recently a division of W L Gore, best known for its Gore-Tex waterproof fabric, came to Robert Freid for help deciding where to offshore its manufacturing. Some Gore executives favored Latin America for its proximity to the US. It offered similar time zones, they argued, had less of a language barrier, and would save countless hours of engineers' travel compared with Asia. Others, though, wanted the new manufacturing site to be close to important customers in Asia. 

Freid started by researching the relative safety and economic stability of all the countries under consideration, plus the availability of technical infrastructure to support possible automation. Next, he estimated contract manufacturing production costs in the countries of interest. While his firm’s model considers many variables, wages usually account for most of the cost difference in manufacturing. 

Although overseas labor clearly is much cheaper, he points out, it's also important to consider new costs incurred for shipping longer distances, increased shipping time and inventory reserves, import duties and fees and employee travel costs. Yet even factoring in these costs, Asian manufacturing offered clear cost advantages over the convenience of Latin America. Using an indexed model of the cost of producing a composite of Gore products with automated manufacturing in the United States, Freid calculated that Latin American production would cost 10 percent to 40 percent less. But Asian production could cut the cost by as much as 60 percent. 
In the end Gore selected two contract manufacturing partners, one in Thailand, one in Malaysia. One ranked highly in the selection criteria. The other, although lower rated, was already being used by Gore to manufacture a few products and was qualified as a supplier by key customers. 

Though the structure and content of the contract will vary considerably depending upon individual client needs, it is very important that a manufacturing agreement be established between the client and contract manufacturer prior to beginning work, Freid says. This ensures that mutual expectations are clear and mechanisms are in place for continued improvement. “I have one golden rule,” he adds. “I do not recommend a contract manufacturer to my client if they manufacture a similar branded product for themselves. The key word is ‘branded’, as opposed to a pure contract manufacturer who only makes it for others.” 

However well managed overseas contract manufacturing is, it will always carry an element of risk. In extreme cases, piracy and hijacking of portable high-value goods has to be considered, but for some manufacturers, much less obvious risks are just not worth taking. One manufacturer who had considered offshore manufacturing told The Manufacturer the idea had been rejected on the grounds of customer confidence. “If word got out that we were even considering toll manufacturing, we felt our customers might think we had lost control of the quality processes. Our competitors would certainly have latched onto that idea. We think we would have really suffered if we had taken that business model.” 

Another reflected a sense of duty to the US, a fairly common motivation. He argued that his family firm had been founded by his grandfather in Cleveland, OH during the second world war and since then had invested so much in education and distribution, as well as manufacturing, that he was not about to take it offshore. Instead he regards it as his job to do world-class manufacturing with world-class employees right here in the US. 

For many, contract manufacturing has failed to live up to their expectations. Perhaps they had the wrong expectation; perhaps they were unprepared, or had not fully explored the alternatives. Others swear they are still in business solely because they went overseas: they are the ones who covered all their bases.