Where Should OEMs Manufacture

Where Should OEMs Manufacture? – The Changing Landscape of the Electronics Supply Chain

Intro

Original Equipment Manufacturers (OEMs) who partner with Electronics Manufacturing Services (EMS) providers face a critical choice when selecting their manufacturing location. Historically OEMs have had to consider the traditional dichotomy between high-quality, costly US manufacturing or cheaper, less reliable Asia-based manufacturing. But changing economic factors have given rise to a third possibility which presents the opportunity to strike a balance between the best of both worlds. Nearshore manufacturing leverages international manufacturing options while staying in the same geographic region, minimizing many of the challenges of overseas production. Nearshore production, most often in Mexico, can deliver the quality OEMs expect from North American electronics while offering cost-savings that surpass those available in Asia.

To understand why nearshore manufacturing has become such an attractive option for OEMs we must consider the changing economic conditions that have given rise to the nearshore trend.

  • Rising Overseas Labor Rates
  • Mounting Trade Restrictions
  • The Convenience of Proximity
  • The Pandemic’s ‘New Normal’

Rising Overseas Labor Rates

Part of what made Asia manufacturing an attractive option to US companies in recent decades had been lower wages than other parts of the world with sufficient electronics manufacturing infrastructure. Compared to Europe or the United States, manufacturing in Asia delivered substantial cost savings even after increased shipping and distribution costs. But this reality has changed over time as wages have steadily risen across most Asian countries in recent decades.

According to the United Nations International Labor Organization (), real wages in China more than doubled from 2008-2019, rising 120%. Over the same time period US wages rose a mere 10%. The trend becomes even more clear when considering minimum wage. The US has maintained the same federal minimum wage since 2010. Accounting for inflation this amounts to a 1.7% decrease in real minimum wage annually from 2010-2019. Conversely, China has seen a 6% rise in its real minimum wage annually since 2010. While skilled manufacturing positions are seldom minimum wage, the minimum wage drives wages in a wide range of industries and positions. These wage trends have gradually and perpetually made US manufacturing more viable from a cost perspective.

As wages in China rise and the US becomes comparably more affordable, OEMs may wonder if there is still a viable low-cost option for electronics manufacturing. While some turn to other South Asian nations, the answer can be found closer to home in Mexico manufacturing. Since 2008 real wages in Mexico have fallen over 10%. In the period from 2010-2019 Mexico’s real minimum wage rose 2.9% per year. As US wages stagnate and China wages skyrocket, Mexico presents a stable, low-cost labor market that maintains standards that the electronics industry has come to expect from North America manufacturing.

Mounting Trade Restrictions

The manufacturing industry has become accustomed to the cost of international trade. Shipping components and completed assemblies back and forth across the Pacific is costly and time consuming, particularly if errors require assemblies to be shipped back for rework. As tensions have mounted, the costs of manufacturing internationally have continued to rise. Beginning in 2018 the US and China have been placing escalating tariffs on goods produced by the other, culminating in 2020 with US tariffs on Chinese goods ranging from 7.5% to 25% depending on the product.

As these shipping and tariff costs quickly negate many of the savings achieved through Asia manufacturing, many companies have begun to relocate manufacturing closer to home. Mexico remains a prime option for its low-cost, close-to-home manufacturing capacity and comparative lack of tariffs or restrictions. Historically US-Mexico trade had been protected by the North American Free Trade Agreement (NAFTA). NAFTA has since been replaced by the United-States-Mexico-Canada Agreement (USMCA) which similarly aims to preserve free-trade in the region. These and other trade regulations expressly protect trade between the US and its North American neighbors, supporting the reliability of Mexico as a nearshore manufacturing option even amidst mounting trade restrictions.

Beyond the monetary considerations, many companies in critical industries, such as aerospace & defense or medical devices, must also consider regulation surrounding the transportation of sensitive technology and information across international borders. Many protected technologies simply cannot be manufactured overseas due to regulatory limitations. There are fewer restrictions on sharing technology among North American nations, supported by a history of free-trade and agreements like the USMCA. Nonetheless, some technologies are required to be designed and produced domestically, such as certain defense equipment mandated by the National Defense Authorization Act (NDAA) provisions on domestic manufacturing. Even in these cases, specialized North America-based EMS providers can leverage nearshore production to save costs when possible while offering US production when regulation requires. Geographic proximity and close collaboration between your EMS partner’s US & Mexico facilities enables a hybrid domestic-nearshore approach that would not be possible when collaborating across the Pacific Ocean.

The Convenience of Proximity

For North American OEMs the benefits of selecting an EMS partner in the same region are clear. Having a manufacturing partner nearby makes shipping faster and cheaper. In an economy where being first-to-market is a huge advantage and consumers increasingly make decisions based on price, saving time and cost in your shipping process can be a critical competitive differentiator. A streamlined supply chain minimizes downtime so your completed devices can fly off the production line straight into the hands of your end user.

But hasn’t the EMS supply chain already grown to accommodate these shipping costs and lead times? To an extent – but costs are rising, and end-user expectations are changing. Rising oil costs, emissions taxes, and changes to trade policy are causing cross-Pacific shipping to grow ever costlier. While these costs were historically offset by savings on labor, now both cost drivers are increasing in tandem. Similarly, instant-gratification consumer culture is spilling over into other areas of the economy. Whether your end-users are medical professionals, military personnel, or consumers, expectations for timely delivery are rising. These changing economic factors make it harder to justify overseas manufacturing.

All too often OEMs conflate the advantages of a close-to-home manufacturer with costly US production, but this doesn’t have to be the case. Nearshore Mexico electronics manufacturing captures the best of both worlds with lower input costs and the benefits of geographic proximity. Shared time zones and a largely bilingual labor force mean real-time communication with a Mexico manufacturer is substantially easier than scheduling middle-of-the-night calls with your Asia-based EMS partner. Plus, geographic proximity makes in-person facility audits substantially easier, allowing OEMs to evaluate the processes, technology, and production floor that will bring their device to life.

The Pandemic’s New Normal

In today’s economy, any supply chain decision must consider the profound impacts of the COVID-19 pandemic. The electronics supply chain has become more complex than ever as traditional strategies for sourcing, production, and distribution are challenged by the pandemic. A tidal wave of economic disruption has compounded existing supply chain challenges as rolling production shutdowns, component shortages, and unpredictable demand have brought supply chain resilience to the front of the EMS industry.

Wages Amidst the Pandemic

It’s hardly surprising that the pandemic has impacted the labor force and wages. Among UN G20 nations, COVID-19 has disproportionately resulted in wage cuts and job losses among blue collar employees. The UN’s ILO finds that within the US 35% of workers reported wage cuts amidst the pandemic while unemployment saw an unprecedented spike, reaching nearly 15% by April 2020. The disproportionate job loss among these workers resulted in a misleading 6% increase in average real wages in 2020 as many employees were excluded from the labor force. Workers with degrees from higher education institutions were less than half as likely  to lose their jobs during the pandemic. Research in China supported by the Canadian Institute of Health Research found that the impact in China was similar, disproportionately impacting less educated, lower paid workers.

What does this mean for OEMs deciding between US or China manufacturing? In the short term it means wages are generally lower for manufacturing personnel in both countries while engineering costs remain similar to pre-pandemic levels. In the long term the industry anxiously awaits insights into differing recovery speeds. If wages recover more quickly in one nation compared to the other this may impact the attractiveness of manufacturing. Unlike the US or China, average wages fell 1.5% in Mexico according to the ILO, even while unemployment rose. This indicates that Mexico is likely to remain a cost-effective option through the course of global economic recovery.

Trade Restrictions Amidst the Pandemic

While trade restrictions in direct response to the pandemic have been largely limited to medical technology, it has indirectly supported a wave of often protectionist trade policies as individual countries aim to insulate their economies from global instability. The US response has included from tariffs placed on inputs from China, limitations on exporting certain medical devices and supplies without prior approval from the Federal Emergency Management Agency (FEMA), and new protections for US labor force against outsourcing. This is the paradox of trade policy’s response to COVID-19 – while most countries seek cooperation as a means of overcoming the challenges of the pandemic, they simultaneously take steps to protect their domestic labor force from economic disruption. Over time this is likely to result in rising tariffs and restrictions on outsourced .

Overseas Shipping & Travel Amidst the Pandemic

While trade restrictions in direct response to the pandemic have been largely limited to medical technology, it has indirectly supported a wave of often protectionist trade policies as individual countries aim to insulate their economies from global instability. The US response has included from tariffs placed on inputs from China, limitations on exporting certain medical devices and supplies without prior approval from the Federal Emergency Management Agency (FEMA), and new protections for US labor force against outsourcing. This is the paradox of trade policy’s response to COVID-19 – while most countries seek cooperation as a means of overcoming the challenges of the pandemic, they simultaneously take steps to protect their domestic labor force from economic disruption. Over time this is likely to result in rising tariffs and restrictions on outsourced .

An overall decline in economic activity amidst the pandemic hit overseas shipping particularly hard. The UN Conference on Trade and Development (UNCTAD) estimates that global trade maritime trade in 2020 was down 4.1%, marking the first year of decline since 2009. Though rates remained stable throughout the pandemic, shipping companies maintained profitability by decreasing capacity causing lead times to stretch. UNCTAD further argues that the pandemic has challenged lean supply chain models with ‘just-in-time’ approaches to shipping. The apparent volatility of the system displayed by COVID-19 has recontextualized the risk associated with prioritizing cost-efficiency over reliability.

More recently, the transportation situation has become dire as end-market demand recovers globally across industries. Overseas shipping from China has reached critical capacity as logistics companies that had restricted capacity amidst the pandemic struggle to return to pre-pandemic levels. By late December 2020 shipping rates from China to the US were up 145% while routes from China to Europe rose as much as 264% compared to December 2019, reports CNBC. The drastic decline in air travel brought about by the pandemic has further exacerbated the shortage of shipping capacity as air freighting can no longer help to fill unmet demand at the same rate. In essence, the pandemic exposed the often overlooked risks of relying on an overseas supply chain when affordable and timely shipping is not necessarily assured.

Conclusion

There are a multitude of factors for OEMs to consider when selecting an EMS partner, among the most critical is location. As the global economy changes, it has challenged traditional assumptions about the Asia/North America manufacturing dichotomy. While wages rise in historically low-labor cost countries, OEMs must reconsider what it means to be a low-cost option. Mounting trade restrictions have further complicated the transfer of devices across the Pacific Ocean, especially in recognition of rising shipping rates and lengthening lead times. Further, the COVID-19 pandemic has exacerbated pre-existing supply chain issues and forced OEMs to reconsider the relative importance of maximizing cost savings as opposed to minimizing risk.

There is no one ‘right’ answer. OEMs must contemplate the complex and changing landscape of the industry to determine what suits their individual needs. With all the uncertainty introduced in today’s supply chain, OEMs can rest assured that one unchanging aspect is the value of considering all possibilities. Connect with potential EMS providers in different locations, solicit quotes, and gather information. The best decision is the one that comes from laying out the alternatives and selecting the winner.

How can we help?

At Compass Electronics Solutions we are full-service EMS providers specializing in North American markets. Our range of US & Mexico manufacturing options allow OEMs to tailor support to their needs from a cost and regulatory standpoint. With over 50 years of electronics experience spanning a wide variety of industries, we’re equipped to support OEMs on projects ranging from medical device design to high-reliability military technology, to cutting-edge consumer gadgets. Reach out to Compass Electronics Solutions today to discuss how we can leverage our network and expertise to help you realize innovation!

Where Should OEMs Manufacture? – The Changing Landscape of the Electronics Supply Chain
How To Foster A Culture of Continuous Improvement
View Compass Electronics Solutions News and Insights
View Embedded Products at Beacon EmbeddedWorks