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IPC: Business Without Borders?

IPC’s 2008 survey indicates some sourcing patterns are shifting from Asia back to North America and Europe.

 

Business without borders

One year ago, the world was an entirely different place, says Bob Wiegand, vice president of sales and marketing for Eastek International, an electronics manufacturing services company in greater Chicago with 465,000-square-foot manufacturing facilities in southern China. Gas had soared to $4 dollars a gallon, copper peaked at a record high, the U.S. dollar exchange rate was weakening and labor rates in China were increasing.

“Given all of those factors, the cost of doing business in Asia was growing,” says Wiegand, whose company markets a concept called, The Eastek Edge, an end-to-end manufacturing process for companies seeking to design, source and/or produce products in China. “That had people re-evaluating, ‘Does it make sense to go to China?’ For a lot of companies, it didn’t anymore.”

IPC Market Research also observed the possible trend, says Sharon Starr, director of market research for IPC. Industry buzz indicated sourcing patterns may have been migrating away from China and back to North America and Europe. In response, Starr’s department surveyed executives and marketing professionals from EMS, printed circuit board and supplier companies to explore the issue.

The survey, conducted in November 2008, concluded that 42 percent of the 50 participating companies had seen some portion of their business return from Asia in the past two years. Survey findings were made public to IPC members in January 2009 through the report, A Reverse Trend in Regional Sourcing in the Worldwide Electronic Interconnect Industry.

“This issue seemed to be coming up regularly, but there was no hard evidence to support it,” Starr says on IPC’s decision to conduct the survey. “[It] was an attempt to confirm that the trend is real and to begin to quantify its impact.”

A Problem of Quality

Michael Gasch, consultant at statistical data firm Data4PCB in Schramberg, Germany, and a 20-year industry veteran, says that from his perspective, quality control was the main reason an increasing number of companies reversed their sourcing patterns.

“Some Chinese manufacturers became sloppy and many quality issues … have been [plentiful] during 2008,” Gasch says. He also adds that the increase in fuel prices through mid-2008 raised both the transportation and final costs of products. “Combine that with long supply chains and rising costs, and European customers with smaller volumes and quality-critical products pulled their orders back to European manufacturers. Small volumes as they are the case in industrial electronics were no longer welcome in China last year. The changes in the economic environment have changed this fundamentally.”

In the U.S. markets, Wiegand says he observed similar source reversal trends. “About two years ago, there was a migration, especially with the quality issues surrounding China products,” he says. Additional IPC survey findings, including currency exchange rates, long supply chains, costs and communication difficulties, all came into play for Wiegand and his company, as well.

Room for Leeway

While Wiegand says sourcing some products to Asia has declined in the past two years for his company, he says the trend is not definitively black-and-white. In fact, in the past six months, he says he witnessed a revived interest in sourcing products back to Asia. In Eastek’s case, medical and telecom products are making a strong comeback to the Asian assembly lines.

“What I have seen in the past six months is an amazing reversal,” he says. With the U.S. dollar stabilized and the cost of labor and materials leveling off, outsourcing entire production lines to an Asian country such as China is yielding immediate and significant savings versus incremental cost savings for outsourcing sub assemblies.

“It also gives them access to the market, which is what companies want,” Wiegand says, who acknowledges that in order to get solid evidence of such trends, another survey would have to be conducted. “At Eastek, we have never seen activity like this where clients are outsourcing entire production lines versus sub assemblies.”

Penny Pinching?

While outsourcing may seem like the best cost-saving option for companies that seek higher product volume and expanded market access, Gasch says if they took a closer look, many would realize they are spending more in the long run.

“Buyers usually want to see just price and transportation charges, but it is much more than that,” he says. He estimates outsourcing translates into a 3 to 5 percent cost savings after factoring in qualification, follow-up, audit, supplier set-up and travel expenses.

Instead of focusing on supposed cost cutting, Gasch recommends businesses take a broader look at the design and quality of their products, the traditional “total cost of ownership.”

“Supply chain management should be a value chain,” he says. “When [products] compete only on price they lose their identity and become interchangeable.”

Wiegand says there will always be a niche for domestic EMS providers as it relates to the development and short run batch volume of products. “But I certainly think long-term production volumes will continue to migrate to low cost countries.”

Starr adds that future outsourcing trends remain to be seen in light of the current global economic crisis.

“We won’t know until we conduct another survey on this topic,” she says. “It all depends on how the suppliers are reacting to the crisis.”

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