Today’s MilAero Options: Outsourcing—‘Everybody’s Doing it’ Not so True Today
June 27, 2016 | Marc CarterEstimated reading time: 2 minutes
History
There was a time, not so many decades ago, when that most commonly-stated mantra (“lower labor costs”) behind offshoring printed circuit fab (and some assembly) operations, still had some case-by-case validity. There were other drivers that could and did apply in some cases, including:
- Availability of the latest in production technology (backed by governmental investment, favorable tax status, long-term strategic investment strategy vs. short-term profits)[1]
- Simple geography, both for those with major East Asia markets and where necessary intermediate manufacturing inputs (notably electronic components, modules, displays, etc.) are manufactured nearby[2]
- Overt or hidden “China content” requirements imposed by state and quasi-state organizations (CATIC, etc.) as condition of sale of completed equipment into China
- Outsourcing “in crowd trend” (“..if company ‘X’, our major competitor or main customer is outsourcing to China, they must have research that justifies the move…”). The “Fad diet” justification.
The relative weights given those factors in the decision process varied wildly between organizations, and (naturally) affected the likelihood of success of the outsourcing venture[3].
Even a well-reasoned and thoughtful “correct” (at the time) decision may need re-thinking if the underlying factors change, and, in regards many of the factors behind choices to outsource manufacturing operations to China, things have certainly changed.
Present Day
Considering ONLY the labor cost of production metric, the decisive advantage in labor cost contribution to the cost of goods produced that China enjoyed in the mid- to late-1990s has all but disappeared. Wages in the manufacturing sector in China, on average, increased eight-fold between 1995 and 2009. As recently as last year, the regional wage differences across China were still driving manufacturing operations there further inland to the Western provinces, but even that is starting to shift to even lower-cost labor pools elsewhere in SE Asia[5]. U.S. productivity advantages have eroded in relative terms, but are still much higher than in China[4], such that the manufacturing output per outlay (“effective labor cost”) is only slightly lower in China than in the U.S., by some calculations, around 4%[6].
There are other factors at work here, as well. With the increased standard of living, expectations have changed, labor relocations from low-paying regions to high-paying regions have highlighted inequalities, and overcapacity, automation, and reduced global demand have raised the dual Chinese dragons of “layoffs” and “strikes” to alarming levels. Beijing’s responses have reflected uncertainty, unfamiliarity with the problem, and inconsistency. Some parallels between the current situation in China and the events leading to the surprising Polish Solidarity phenomenon have been mentioned[7,8]. Automation improvements and technology shifts further reduce the importance of wages in determining production location[9].
References
1. H.Nakahara (NT Information Ltd.) comments in Custer Consulting Group Daily News, 21 March 2016; CNN, Manufacturing.net articles referencing Oxford Economic Reports, “China Labour Costs Only 4 Percent Below US.”
2. “Geography and offshoring to China,” Ma and Assche, Voxeu.org.
3. “Strategic Outsourcing: the Good, the Bad, and the Ugly,” Ligus, Rockford Consulting.
4. “Global Supply Chain Growth Set to Slow Amid Technology, Labor Changes,” Whelan, Wall Street Journal.
5. “Made in China' labor is not actually that cheap,” Yan, Money.cnn.com.
6. “Report: China Labor Costs Only 4 Percent Below US,” Szal, Manufacturing.net.
7. “Striking Workers Bad For Business in Waning Chinese Industry,” Soergel, US News and World Report.
8. “China on Strike,” Griffiths, CNN.com.
9. “Global Supply Chain Growth Set to Slow Amid Technology, Labor Changes,” Whelan, Wall Street Journal.
Suggested Items
SEMI Applauds U.S. Chips Act Award for Samsung Electronics Facilities to Strengthen Domestic Semiconductor Supply Chain
04/17/2024 | SEMISEMI, the industry association serving the global electronics design and manufacturing supply chain, applauded the United States Department of Commerce’s announcement of a Preliminary Memorandum of Terms for an award under the CHIPS and Science Act to support the expansion of Samsung Electronics’ presence in Texas and the company’s development and production of leading-edge chips.
Ark Electronics Expands Global Manufacturing Factory Network in North America and Europe
04/17/2024 | PRNewswireElectronic Manufacturing Company Ark Electronics recently announced the expansion of its Global Factory Network with the addition of Electronics Manufacturing Service (EMS) capabilities in Mexico and Europe.
SIA Applauds CHIPS Act Incentives for Samsung Manufacturing Projects in Texas
04/16/2024 | SIAThe Semiconductor Industry Association (SIA) released the following statement from SIA President and CEO John Neuffer applauding semiconductor manufacturing incentives announced by the U.S. Department of Commerce and Samsung.
Report Reveals ‘True Impact’ of Manufacturing is Nearly a Quarter of UK GDP
04/15/2024 | Manufacturing Technologies AssociationManufacturing is having a far greater impact on the UK economy than first thought according to a major new report released today.
Design Community Town Hall Review
04/11/2024 | Kelly Dack, CID+, EPTACThe Design Community Town Hall took place on the afternoon of April 10, 2024. I was fortunate to attend this event, which marked an opportunity for members of some newly found design groups to get together and exchange ideas. Peter Tranitz, senior director of solutions for IPC, opened the session with a slide presentation introducing these new groups and members within the solutions department.