Is The Trade Deficit About to Change?
By John MacWilliams, Bishop & Associates, Inc.

How would you like to jump start North American manufacturing by offering to pay a bit more for products made in this region? This question can be asked in many regions, including Europe, Japan, and Taiwan. The difference between world-class domestic manufacturing and costs in China are smaller than you think.

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Editor’s Note: The $50 billion global connector industry is vibrant and hugely diversified. However, the market for connectors is dependent on OEM equipment, cabling, and other applications. Many operate with a global supply chain and outsourcing. As goes these applications, and their manufacturing locations, so goes the connector industry.
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Much has been said about the trade deficit with China. Last year we wrote about it in “How the iPhone Impacts U.S. Trade Deficit with China.” That article was backed by research in Japan by Yuqing Xing and Neal Detert of the National Graduate Institute for Policy Studies, detailed in a Wall Street Journal article. Its findings:
 

1. The actual iPhone trade deficit (on an earlier iPhone version) was lower than reported, because many of the components used in the phone were made outside of China — including some key components by U.S.-based companies.

2. With labor estimated between 3% and 4% of total manufacturing cost, i.e. less than $10/unit, it was proposed that the phone could be made in the U.S. and still make a profit.

3. The price commanded by the iPhone has little to do with where it is made, and a lot to do with its compelling design, software, and applications.

4. And recently the phone has encountered more competition. Samsung has now surpassed Apple in total smartphone market share.

5. Also, now that China’s labor costs have more than doubled, the cost differential between U.S. (or other regions) and Chinese manufacturing is declining. But some say the differential is still too high to bring high volume, low-cost manufacturing back to the West. It is more likely that other, even lower-cost venues will be sought out first, such as Vietnam.

6. But could future production for products like the iPhone be split up by region? Yes, but the supplier might lose economy of scale and would certainly incur additional investment costs for multiple facilities.

This discussion must acknowledge the “World Market” aspect of many of today’s consumer electronics products, the difficulty of splitting up production, and the strength of competition. Also important is the key role played by EMS firms, such as Foxconn, who have invested heavily in Chinese manufacturing campuses where a significant amount of bench labor is employed — more than many would expect in high volume consumer products.

Will a crossroads be approached or will we see a gradual shift to the return of high volume manufacturing in the West, or to near-shore locales such as Mexico or Eastern Europe? Early outsourcing from the U.S. went to Mexico. Much of this was then lost to China. An article in the October 2011 Printed Circuit Design & Fab/Circuits Assembly says Mexico’s labor rates are now on a par with China. However, Mexico’s problem of drug-related violence is an issue that will affect all business there going forward. Other issues with China’s manufacturing for export, including quality, logistics, and red tape, are beginning to drive some business back to the West. This tends to be in larger systems, not high volume consumer products.

An interesting article in the U.K.’s Telegraph predicts that within five years or so, “The phoenix will rise again,” with the U.S. and Canada, at least, moving toward energy independence, and enacting reforms that will help strengthen domestic manufacturing industries.

In addition, China’s burgeoning internal demand is a factor that may begin to overshadow exports. Or, in addition to internal demand, export products will benefit from the cost economies resulting from the Chinese market.

Questions remain: Can companies build world-products in more than one location? Will some production gravitate back to the West? One would think this is possible, since most EMS larger firms are global. Yet many have so reoriented their manufacturing plant footprints that a return to the West is unlikely. There are also nuanced differences between regional markets, logistics, shipping costs, effects on inventories and the supply chain, and local (home-based) engineering that could encourage a shift.

Here is a list of other issues to be dealt with, if manufacturing is to return to North America, Japan, or Europe:

1. Infrastructure issues have arisen due to outsourcing of high volume electronics assembly over the past decade. This means investments in plant and equipment will have to be made, and many component parts may have to be imported.

2. The skill set of the labor force, especially for high-tech manufacturing, may need to improve through training and education.

3. The public needs to show more preference for domestically produced goods, yet not discriminate against fine, high quality goods from other regions. Bottom line is, if it’s the best, buy it. The West must produce the best if they are to succeed.

So, could we be nearing a crossroads where regional manufacturing will again be on the rise? It is starting with high tech, larger, more complicated products, and with highly automated and technical semiconductor products that have minimal but highly skilled labor. This trend, if it does occur, may take years to reach the level of cell phones and laptops.

Data compiled on U.S. shipments of computer and electronic products over the past two decades shows not a very pretty picture about   U.S. manufacturing trends. (The U.S., for one, has excellent long-term data via its Census Bureau).  With few exceptions, U.S. shipments have been on a downward slope since 2000, losing over $150 billion in U.S. value, while some other segments, such as medical electronics, are on the rise. This will be detailed in a new Bishop Research Report, Connector Industry: 2011-2021 to be published by year-end. 

What you can do:

1. Make an effort to buy regionally produced products without compromising quality, innovation, or brand preferences.

2. Don’t hesitate to communicate with others, including company websites and retailers about your desire and willingness to pay for locally made products.

3. A current survey by evertiq.com shows ~70% of respondents would pay more for a U.S.-made product, with 70% willing to pay from <10% to 20% more. Our guess is the real answer is highly product-specific. For instance, the iPhone or iPad would command high sales and a price premium no matter where they are produced. Being made in the U.S. would be the icing on the cake.

4. There are encouraging signs: Many world-class products were innovated and designed by U.S. companies (or those from other regions) who have become world leaders in their fields. Examples include Japan and Europe, which preceded the U.S. into foreign markets. Perhaps a future step will include more domestic manufacturing, both for consumption and export.

John MacWilliams Senior Consultant and Analyst, Bishop & Associates Inc. John has enjoyed a long and diverse career in the electronics industry, including management positions with IRC, TRW, AMP, and his own company, US Competitors LLC. He is the author of many industry articles, including past and current iNEMI.org connector industry roadmaps, U.S. government competitiveness initiatives, and numerous Bishop Reports on the computer and consumer electronics industries. He is an outspoken supporter of the future of U.S. manufacturing in a global marketplace. John is a graduate of the Wm. Penn Charter School in Philadelphia, and of Lehigh University, Bethlehem, PA. He and his wife Louise, reside in Newark, DE, and Delray Beach, FL.