Bolaji Ojo, EBN
Western plants may never be as busy as they were 30 years ago, but many will hum again. This isn’t a vain wish but one rooted in the same economics that drove manufacturing over the last 20-plus years to lower-cost regions and resulted in most production being centralized in China.
Admittedly, the shift I am expecting won’t be as dramatic or as far-reaching as the outsourcing of production to China, but over time, manufacturers will re-evaluate their strategies and weigh more carefully where they put their plants. The odds are China won’t be as attractive a location as it has been in recent years, when knee-jerk reactions pushed high-tech OEMs and other manufacturers to transfer or outsource most of their production activities there.
Some readers responding to an earlier post on this subject argued that the West is no longer cost-competitive. I disagree. The West can be and will be cost-competitive again. It will also regain some lost jobs. Here are my reasons:
1) Manufacturers cannot afford the dominance of the system by a single region. This is probably the strongest case for moving some manufacturing activities back to Western countries. The risks to the global supply chain inherent in the current system are too great for everyone to ignore. Last year’s earthquake and tsunami in Japan and the flooding in Thailand exposed a serious flaw in high-tech manufacturing strategies. The industry overcame most of the associated problems within months, but it has also begun to reorganize production to avoid future problems.
A real sense of urgency has yet to grip the industry, but many companies hurt by last year’s earthquake, especially Japanese firms like Renesas Electronics Corp. (Tokyo: 6723), are quickly diversifying operations. In many cases, they are implementing redundancies, not just at home, but also in higher-cost but more stable regions. The rest of the industry is tracking their actions, and I believe they will learn to take similar steps.
2) Chinese production today is inefficient and unsustainable. The plants haven’t evolved into the high-tech version of next-gen products. In my opinion, they have dumbed down the production process by relying heavily on humans to do jobs that would have been automated elsewhere.
A recent ABC News report confirmed something that was already well known in the industry: Most high-tech equipment manufactured in China is hand-assembled by hundreds of thousands of workers laboriously slapping pieces of metals and silicon together, polishing enclosures by hand, and listening to robotic voices announcing product verification.
It’s as if Foxconn Electronics Inc. took manufacturing back to the Dark Ages, gaining cost efficiency on the basis of low wages and the ability to throw a lot of human hands at tasks at all levels of the supply chain. Many of these jobs could be done more efficiently by robots, and eventually they will be. This system is not only inefficient, but also highly controversial, as recent reports over Apple’s partnership with Foxconn have demonstrated.
Eventually, Foxconn and other manufacturers in China will have to adopt more automation, which will drastically reduce the number of hands that touch products. Beyond this, what is the China advantage? Many, including the late Steve Jobs, have argued that workers in China can be mobilized at a moment’s notice to manufacture products. Well, so can robots. And further, they don’t generate emotions when a fire erupts in a processing plant, and they don’t commit suicide. If automation were accelerated, the China advantage would quickly disappear, leaving the same concerns and cost issues associated with facilities in the West minus the negative PR.
3) The West needs the jobs. Western nations cannot survive solely on the “service economy.” There just aren’t enough banking, finance, software development, healthcare, and other so-called services jobs to go around. Plus, many of these positions require a higher level of skills that many in these societies won’t attain for various reasons.
To support economic growth and increase consumption, Western societies need to supplement services jobs with manufacturing positions. These won’t come from energy and government-sponsored infrastructure alone. Even companies manufacturing products in China need Western consumers. Apple offers its new products in the United States first before moving to other countries. Avoiding mutually assured self-destruction requires a new thinking about the global economy that I believe will curtail the grand outsourcing to China.
4) Higher costs in China are already driving change. Steve Jobs reportedly told President Obama that Apple would never again manufacture its products in the United States. If current Apple CEO Timothy Cook understands the global manufacturing supply chain as well as has been portrayed, he will repudiate the Jobs doctrine and explore ways to return some production to the US.
The cost to Apple and other manufacturers of maintaining a single-source region for production is rising steeply and will continue to climb in the coming years. Apple’s main contractor in Asia, Foxconn, has been hiking wages for its workers and may have to keep doing so every year to satisfy restive employees. How much longer before the China wage advantage erodes, leaving a dramatically different competitive environment?
China may maintain its cost advantage over the next five to 10 years, but some other developments are driving up the total cost of product ownership for manufacturers, and these will factor into outsourcing decisions. One issue is the outcry over labor conditions at Foxconn plants. In response, Apple has published a listing of its suppliers and has paid the Fair Labor Association to review working conditions. (See: Will Apple, Foxconn, & Sweeteners Satisfy Labor Activists? and Who’s on Apple’s Supplier List?)
Will this be enough? No. Apple still is facing a tsunami of negative press. To reverse this, it will need to take more substantive action, such as asking Foxconn and other contractors to manufacture some products in other regions. A supplier audit cannot delete the portrayal of Apple as a company that makes billions in profits on the backs of low-paid Chinese workers living in dormitories and working at least 60 hours a week.
There are also legal implications for Apple and other manufacturers. A lawsuit before the US Supreme Court pitches a Western company against a Nigerian community, which alleges that the firm colluded with a dictator to pollute the country. Peter Weiss wrote about the case in a New York Times op-ed last week:
The Supreme Court will hear a case with many potential ramifications for American and International law, and for corporate responsibility for human rights around the globe. The justices will be asked to decide whether the corporations to which they have been extending the rights of individuals should also be held accountable for crimes against human rights, just as individuals are.
This case has significant ramifications, especially for the high-tech industry. Any alleged violations of “human rights” in a foreign manufacturing facility can become the basis for an expensive lawsuit in a US court. That means manufacturers will no longer be able to put blame for cattle-pen living conditions on China or contractors. Could some human or labor rights organization drag Apple, Dell, HP, Nokia, and other high-tech OEMs to court for conditions at their contractors in China? Yes.
5) China’s political and economic system is inherently unstable. This is another controversial issue — and one many of us would rather ignore. The country’s economic success is built on a doubtful version of capitalism tacked on to the back of a rigidly communist political system. If you are a shareholder in an OEM or another type of manufacturer in China, you should be concerned about how its political system is evolving, because it will impact your investment.
Many of us would like to think China is immune from events occurring in other parts of the globe, including last year’s Arab Spring. But is China really that different, and will its citizens stop demanding changes as the country bites deeper into capitalism? We can hope it will continue to manage its transition into a market economy peacefully, but what happens if the country encounters massive protests that disrupt the supply chain?
The Chinese government is rethinking the country’s future and how fast it should evolve. In a recent report done in collaboration with the World Bank, “China: The Case for Change on the Road to 2030,” Chinese officials looked at how it should restructure. According to the Washington Post, the officials concluded that China needs to reduce the role of state-owned enterprises, “allow more competition in the banking and financial systems, give more support to innovation, and allow its population greater mobility by easing current residency restrictions.”
Is the global manufacturing industry getting itself ready for 2030? Will it continue to see China as the sole or most optimal manufacturing center? I believe OEMs and other producers will switch tactics, even if this involves merely hedging and reducing risks by requiring contract manufacturers to put plants in other countries. Places that will benefit from this swing will include Brazil, Mexico, Eastern European countries, and even places in North America that can handle higher-end, automation-heavy production.
All this may not add up to much now for companies still bent on competing solely on immediate product cost, but many executives understand fully how unexpected events can derail carefully laid plans. For such companies, scenario planning is a part of daily operations, and right now, we are heavily tilted as a global manufacturing community toward China. That alone is a problem.