For the first time in years we see parity in the Eastern US among EMS factories from Asia, Mexico and the US. This EMS market condition will permit American OEMs (the EMS industry refers to OEMs as customers) to have more EMS pathways to choose from. Now more than ever, such EMS assignments will require deeper investigation relating to the OEMs’ evaluation of manufacturing strategies.
For the purpose of this column, I am defining Western-US as the states of California, Oregon and Washington. I define Eastern-US as all states east of California, Oregon and Washington. This generalization is a convenient attempt to emphasize the major differences between Western and Eastern US. I am essentially treating the US region as a simple continental divide matrix to demonstrate the general trends of OEMs and EMSs.
The past. With NAFTA laws ratified in 1994, Mexico became American OEMs’ preferred region for lower-cost labor EMS. American OEMs rushed business to Mexico for its efficacies in transport, travel, language, quality performance, IP protection, NAFTA allowances and commonality of time zones. Supporting this movement, Mexican factories were owned, managed and/or influenced by American companies. Mexico rivaled Asia, including Malaysia, Indonesia and Thailand, for medium- and lower-volume assemblies. This market condition changed in 1997 when China was admitted into the WTO. With this affirmation, China’s government demonstrated its recognition of the importance of the EMS sector in developing a strong national economy. Thus, the Chinese government aided its EMS factories with unconfirmed, but highly suspected, subsidy grants for free land, interest-free loans, tax exemptions and other accommodations. The subsidized EMS sector catapulted China to become the most cost-effective region worldwide. China’s rise led to Mexico’s fall. Production allocated to Mexico shifted to China in a tsunami of change. However, Mexico’s fall from its EMS position was not solely a result of China’s competition. Concurrently, Mexico was experiencing a severe rise in crime fueled by drug cartels. Killings were occurring in unfathomable numbers, as were kidnappings and widespread reports of corrupt police and military personnel. Mexican citizens, tourists and American executives retreated from normal lifestyles, leisure travel and business visits. The prospects of American executives traveling to Mexico for business purposes were greatly diminished. Many privately owned Mexican facilities, and namely smaller EMS factories, were shut down due to the abhorrent events and poor business conditions.
Today, we see a rapid shift in the EMS marketplace. This time around, China is losing its identity as the go-to region for assembly, while new developments are giving Mexico a spotlight as a revitalized manufacturing destination. On the sidelines, and now gaining more consideration, are US-based EMS facilities. The following EMS market trends are responsible for this change of fortune:
1. Steadily increasing labor and operational costs in China. China’s cost of assembly continues to increase. The latest reports have hourly labor wages reaching US$3/hr. in Shenzhen and Shanghai, with a loaded labor rate hovering around $7/hr.
These rates represent a huge increase – as much as five times what they were six years ago. We also see overhead and material costs rising steadily in China and an increase in transportation costs due to higher oil prices. These factors are downgrading China as the preferred destination to build product.
2. Total acquisition cost (TAC) convergence. Over the past three years, OEMs have become more conscious of the total acquisition cost or TAC (total cost of goods landed at final destination, which includes unit price of goods, shipping costs, handling, government import duties and cost of money during transit). OEMs have overlooked the TAC initially since China’s labor costing made this study incidental when assessing EMS selections. However, with costs of China’s TAC growing appreciably, it has become prudent to take a closer look at the bottom line costs. We are now seeing closer TAC comparisons between China and the US, close enough for OEMs to reconsider their EMS strategies. Today, OEMs are now moving toward stateside factories for product that would have normally been sent to China without much consternation.
3. Risk of IP theft in Asia. Designs to be developed and produced in China run a greater risk of IP theft. Although the China government is taking overt steps to curb IP theft, OEMs have and will remain fretful with this subject matter. IP theft in Asia is prevalent in China factories only. However, many Asian EMS companies with HQs outside of China own and operate China-based factories and hence are not immune from IP theft activities.
4. Increased demand for US EMS. As China grows less attractive in costs, assembly within the US will grow for products with high BoM costs, lower annual quantities (<100,000/year) and for devices that are cost-prohibitive due to their weight and overall dimensions.
5. Increased demand for Mexican EMS. In phase with the US’s EMS sector, Mexico will see a major uptick in interest. Here are the factors pacing Mexico’s improved status:
6. Western US’s demographics will anchor Asian-based suppliers. Per the report, US’s Business Development Divide – View of US Escapes Asian Manufacturers, the demographics in Western-US, and namely the Silicon Valley area, indicate a considerable population of Asian-American and Asian immigrants. This percentage is mirrored in the high-tech management ranks of companies located in the Western US. Such factors give a stable Asian factory-centric trend for OEMs in that region. Another key factor is the saturation of Asian EMSs’ HQs based in the Western US, as well as the favorable logistics between Western-US and Asia. As a result, China’s EMS factories will maintain their preferred status within the Western-US region despite the increase in China’s TAC.
7. Eastern US’s logistics favor Mexico. The aforementioned report also notes demographics and logistics between US and Mexico create a bond of preference toward Mexico. Conversely, logistics between Asian EMSs and Eastern-US OEMs holds a major disadvantage for the Asian EMSs.
8. ‘Made in America’ is a valued label. The US has a revived decree to utilize American labor. Today, Americans are much more aware of the ramifications of sending labor outside of the US. Although decisions for EMS assignments have had little to do with such sentiment, the Made in America label is a plus for American consumers, and pro-American labor decisions are trending. Assembled in America is another option, giving Asian and Mexican factories a hybrid business approach to partially meet the Made in America objectives.
The global EMS market trade winds are shifting. For OEMs located in the Eastern US, the EMS selection decision will be more difficult than ever, as there are no clear advantages as it relates to factory locations. Adding to the complex EMS decision tree is the need to interpolate the market trends as they occur. Decisions involving the selection of new EMS assignments will be made based on tangible, intangible and unsubstantiated projections of future trends. 2014 will be recorded as a transitional year in the EMS marketplace.
I believe Western US will maintain the status quo in the near term, with Asian factories maintaining their strong presence, characterized by densely populated HQs and a substantial number of local personnel. The Eastern US will be a much more neutral territory, an open battlefield for new EMS business awards.
Also in the Eastern US, Mexico-based EMS factories will reappear as favored “lower-cost” suppliers. Asia remains the leading region worldwide, but this enviable position will continue to be downgraded by rising internal costs. OEMs are growing cognizant of China’s cost issues and are actively investigating alternative solutions. US- and Mexico-based EMS firms will be viewed in a more attractive light, as Asia will no longer set the industry’s price model benchmarks. Adding to the US EMS’s advantage, the Made in America label is now an OEM goal, when possible.
With the Eastern US now considered a “neutral” site, upstart EMS companies seeking business growth with a greater percentage of successful sales campaigns would be better served by focusing on OEMs in Eastern US.
The EMS market, as always, will evolve. In China, we observe a solution-based manufacturing approach in order to minimize cost increases. There is a notable push by Chinese EMS factories to move west in order to secure lower labor rates. The Chinese government appears to be encouraging these moves with subsidies, a throwback to the earlier days of EMS development there. Although the westward solution does resolve the labor rate problem, China EMSs will uncover such issues such as a lack of local infrastructure and difficulty recruiting desirable management and engineering staff members. We also see China factories that are struggling to remain on the eastern seaboard of China (Shenzhen and Shanghai), reverting to automation to lessen the dependency on laborers.
USA-based Tier 3 and 4 EMS companies will be more involved with domestic and multinational OEMs with experience working in Asia. They will come to realize their customer base is not limited to local or regional territories. Instead, the Tier 3 and 4 EMS market will hold a wider range, since OEMs with experience or inclinations to build in Asia are now pulling back to America. These same OEMs may also be in the market to sell into Asia or Europe, and thus the USA Tier 3 and 4 companies will need to be more global in their outlook, approach and operation. This opens up a new chapter for such smaller EMS companies who have viewed their competition as a limited reach of a radius 200 miles. For Mexico, we see positive growth to recapture the role as the low-cost manufacturing destination of USA OEMs. Mexico’s curing of its crime rates and improvements in its economy is most likely to continue and hold a major impact in the USA’s EMS market by the first quarter of 2015.