Electronics Manufacturing – OEM/Rework/Repair Trends – 2015 – A Perspective
Many US companies have decided to bring back electronics manufacturing to North America because of ever-increasing labor rates in China and higher costs of shipping products from Asia to various global end markets. It’s likely that purchasing strategies will also change in the next several years as more OEMs transition manufacturing from China back to Mexico or the United States. Currently, some companies are deciding to insource rather than have products built by electronics manufacturing services (or outsourced contract manufacturers). Recent examples of this include Apple and Lenovo. Those companies have decided to make at least some of their electronics products in house.
An increase in manufacturing in the North American market will affect virtually all operations strategies. Buyers involved in outsourcing decisions will need to evaluate the manufacturing and supply chain capabilities of CM’s doing business in North America. Buyers at companies that have decided to insource may need to find new suppliers or further strengthen relationships with existing ones in Mexico and the US (and perhaps other geographical locations worldwide).
Resultantly, US distributors will certainly benefit from the transition of electronics manufacturing back to the US (and Mexico) as OEMs and CM providers will need them more. And, this will not be only for parts, but for a variety of design, supply chain management, and aftermarket services.
Many in the industry call the trend “onshoring” or “re-shoring.” Sometimes these terms have an “us versus China” connotation which is inappropriate. The trend is really regionalization. In true regionalization, electronics equipment is manufactured in the market in which the product is sold. And, it’s all about capacity utilization. The current data indicates that the geographies which are growing (in terms of electronics manufacturing) are Mexico, Eastern Europe, and Malaysia. Currently, China is stable. This indicates that regionalization is indeed a growing and global trend.
Electronics manufacturing is growing in Mexico because the country has the lowest labor rates of the three North American countries. Also, transportation costs to ship products to the United States and Canada are much less than shipping the products from China. It’s clear that more electronics OEMs are regionalizing their manufacturing, especially low to mid-volume, high-mix production, which includes industrial equipment and appliances. High-volume consumer electronics equipment (e.g. notebook computers and cell phones) that will be sold globally will continue to be built in China and other low-cost Asian countries (Taiwan, Malaysia).
Manufacturing of low to mid-volume appliances and industrial equipment moved to China because electronics OEM executives wanted to take advantage of extremely low Chinese labor rates roughly 10 years ago. It is now apparent that they did not take into account the true total cost of manufacturing in China based upon today’s analysis.
In recent years, labor rates in China have increased 20% per year—and they will continue to rise—so labor cost advantages have greatly lessened, if not disappeared in the region. In addition, transportation costs from Asia have increased significantly as well.
Currently, it is uncertain exactly how much electronics manufacturing will migrate back to North America. We do know that the trend will continue as labor costs in China and other Southeast Asian countries continue to rise.
For 2015, the contract manufacturing industry is expected to grow despite continued economic weakness worldwide. In a report from its Outsourced Manufacturing Intelligence Service, IHS pegs the industry growth rate at 4.0% this year, to $404.5 billion. That’s slower than the roughly 5% growth the industry saw in 2014, but IHS predicts steady, though unremarkable, growth for contract manufacturers worldwide over the next three years. By 2017, the group says revenue will rise to nearly $452 billion as original equipment manufacturers seek to boost production to serve customers in consumer electronics, industrial equipment, appliance, and automotive end markets.
However, many industry experts are now saying that a “major economic dislocation” could easily derail market growth pointing to the sovereign debt crisis in Europe and the U.S. response to realigning its long-term spending trajectory. IHS also noted two key trends to watch in contract manufacturing: customers’ desire to lower costs and suppliers’ drive for improved cash flow. Notwithstanding, the trend of manufacturing flowing back to North America is good and will continue for the foreseeable future. We view this as a great opportunity for new and innovative products to service this market space.