Manufacturers’ planning is stagnant and awaits US government guidance.
Borrowing an expression used by newly elected President Donald Trump, the EMS industry is sitting in Neverland as we start 2017. EMS companies, from large multinationals to mom-and-pop shops, must slow or even suspend planned expansions, upgrades, and/or divest until the US government institutes a defined policy toward American job reclamation. To date, there are no guidelines for changes in import duties, US tax relief and investment incentives. Currently, the EMS industry, not to mention the full body of global manufacturers, awaits more information. Statements about reshoring manufacturing have had their effect on the minds of OEMs and EMSs.
Trump’s aim to reclaim jobs from offshore is a noble agenda and the banner promise in his “Make America Great Again” campaign. The program will be an immediate focal point for the Trump team in 2017.
As for the readership of CIRCUITS ASSEMBLY, we know well the EMS business is complex, with evolving variability of regional factors affecting EMS assignments on a local and global scale. EMS decision-making will grow even more difficult if the US government plans to be involved to rescue US jobs on a company-by-company basis.
The first case: Carrier-Indiana. The first execution of Trump’s job reclamation agenda took place only 23 days after the presidential election. The target: a last-minute rescue of a Carrier plant in Indiana. In what appeared to be a hurried exercise, a “deal” was reached to salvage approximately 700 American jobs (out of an estimated 1,500 scheduled to be eliminated or moved to Mexico). Although a sample of just one, the Carrier case exposes the complexity of the manufacturing industry and the nature of decisions uniquely based on a product-by-product decision tree.
Trump and Vice President-elect Mike Pence put on a personal full-court press, offering Carrier an incentive package to offset the lower labor costs of Mexico and higher tax burdens of US operations. There also may have been whispers of NAFTA import adjustments to tilt the scales more favorably toward maintaining US operations. With the extensive focus on Carrier, coupled by connection with Pence (as governor of Indiana), the reclamation saved about half the jobs. Is this a failure or success? Could 100% of the jobs have been saved? The answer lies in the complexity of the manufacturing supply chain and the understanding of what constitutes EMS and regional selections. Let’s examine.
Each product has its own DNA. Every manufactured product has its own set of challenges based on the bill of materials, specific custom components and manufacturing technologies, creating a unique “one of a kind” model. Each model has its own sweet spot of manufacturing strategies, including manufacturing processing, labor cost necessities, quality control and ship to market. Product variabilities also touch on categories of low-mix/high-volume, as well as high-mix/low-volume production requirements that are sensitive to labor rates. In the first job reclamation exercise, we see how Carrier can justify only a portion of the jobs remaining in the US, while the balance yield to the lower labor rates of Mexico. This “partial” success is a precursor to what can be anticipated in future efforts.
Bringing jobs back to the US should not be viewed as a slam-dunk exercise. Global manufacturing matters are complex, and parameters affecting industry decisions are in constant flux. Political, economic and regional news are a part of the perpetually evolving landscape of global manufacturing. And on top of the effort to reclaim jobs for America is the greater implementation of automation in the US and offshore. Again, using Carrier as a case study, its management recently announced plans to update facilities with automation. This is not exclusive to the US: We also see Asian-based EMSs moving toward automation in their factories.
A door-to-door process. With respect to the complex parameters of the EMS industry, it is impossible to develop a standard boilerplate job reclamation plan to serve the masses. Instead, job reclamation would require customizable prescriptions to include leniencies and associated penalties to accomplish and affect job reclamation. This will be a painful exercise for American OEMs, EMSs and the US government. The roughly 50% success rate at Carrier may in fact be an acceptable outcome considering all the obstacles to overcome.
As the job reclamation agenda unfolds slowly and with deliberate actions, the EMS industry will remain in limbo to determine how the US government will proceed. Here are some of the questions needing guidance by the US government:
Many more questions need to be asked. Until baseline guidelines are set by the US government, EMS companies are plotting the future without a compass.
Setting expectations. As this brief summation of outlying factors revolving around the job reclamation agenda shows, it is certain the process will prove cumbersome, have unavoidable inconsistencies and require tough and unpleasant negotiations by the US government. Carrier is just one example of what lies ahead. For certain, a 50% success rate would be acceptable given the difficulty of creating a favorable bottom-line to salvage jobs in the US that normally would be assigned for offshore assembly. With hundreds if not thousands more OEMs to address, we can anticipate a long and drawn out reclamation process, with adjustments needed from time to time. We can conclude the US government directives affecting the EMS industry will remain a WIP for years to come.
The good news is American jobs will eventually be salvaged to a nominal degree. It is certain Trump’s program will induce an overriding theme for OEMs to be mindful of manufacturing placement. We can conclude OEMs will be encouraged, if not obligated, to seek US-based assembly first, as part of the initial investigation of a manufacturing strategy. This would give US-based EMS operations large and small a refreshing shuffling of OEM priorities and attention. Yet, there is nothing tangible for OEMs or EMSs to bank on with confidence as to how the job reclamation program will take form.
Job reclamation will prove to be an arduous process. The EMS industry must prepare for radical flexibility with requirements that may lead companies to step outside their comfort zone. I expect the EMS industry to have a bumpy, energetic and superfluous ride in 2017.