With the world slowly emerging from the economic downturn, manufacturing hasn’t just picked up. It has become a popular news topic, a focus of business conversation, and, perhaps most of all, a subject of debate in the halls of government.
The revival of manufacturing is viewed as a sign of hope and economic strength. Symbolically, it is a mark of national pride. Growth in manufacturing also translates to both real and perceived job growth. As the political conversation in the developed world has turned to repatriating manufacturing — much of it high-tech manufacturing — we took a quick supply chain view of what makes the “right” location to produce high-tech products. This turns out to be an interesting question.
As high-tech companies have joined forces with contract manufacturers to develop lower-cost, higher-scale manufacturing solutions, something interesting has happened. Contract manufacturers have become really good at manufacturing, particularly developing the processes and quality needed to manufacture high-tech products at scale cost effectively. The advantage of contract manufacturing is no longer a simple matter of labor arbitrage. In many ways, contract manufacturers have supplanted OEMs in their manufacturing prowess — even to the extent of becoming strategic partners in product development.
Over the past few months, some notable high-tech executives have come under fire for suggesting that the ability to manufacture their products may have passed their home countries by. How could they suggest such a thing when manufacturing appears to be so crucial to the economic recovery? They probably say it because it is largely true. And it is not just a matter of cost. High-tech contract manufacturers and original design manufacturers have developed the capabilities required to build many products more efficiently and of a higher quality than most legacy OEM facilities.
Our experience with high-tech and aerospace clients indicates that, when measuring the total landed cost of manufactured goods (the soup-to-nuts costs of labor, inputs, transportation, taxes, etc.), manufacturing quality and efficiency makes higher-cost labor markets extremely competitive with lower-cost regions. As a result, it is not surprising that efficient, high-quality producers from the US to Mexico to Germany are increasingly winning the day.
Yet things are getting interesting. In large part, “Western” countries may no longer control high-tech manufacturing, but there is a reason to qualify the statement. Rising wages in China and elsewhere, coupled with the growing costs of transportation and fuel, regulation, and duties, challenge OEMs and contract manufacturers to develop a new formula for guiding their investments in manufacturing and site location.
If contract manufacturers’ true differentiators are moving away from labor costs and toward rapid deployment, quality, scalability, and efficiency, are they necessarily wedded to a “low-cost” location strategy? As labor and other costs rise in China, Eastern Europe, and elsewhere, will contract manufacturers seek to increase their geographic mobility, knowing that their secret sauce is their ability to stand up, staff, and run high-quality manufacturing capacity flexibly? Could they even go as far as to bring some of that capacity “home”? Though that’s unlikely to happen tomorrow, we may be getting closer to that point.
We may see ourselves entering a world in which the true difference is manufacturing acumen, not the cost of labor. As high-tech devices become more complex, compact, and capable, manufacturing design, planning, and execution will become more pivotal to OEMs’ ability to realize value. Contract manufacturers may stay in the coastal regions of Asia and not seek to move to inland locations like Sichuan. They may consider more geographic diversity in their manufacturing footprint, creating regional centers of excellence. They may even bring their operations back into “high-cost” countries, much as automakers are doing in increasing numbers.
All this is possible because the story is no longer about labor. It’s about the efficiency and quality of the contract manufacturing model.
Source Article from http://www.ebnonline.com/author.asp?section_id=1191&doc_id=243489&itc=ebnonline_gnews
