Reshoring, nearshoring or offshoring – why should engineers care?

Author: EIS Release Date: Aug 17, 2022

Is the electronics industry changing its stance on manufacturing in the Far East? Dan Attewell believes constant evaluation is vital to assess and indicate business direction.

 

This question has been asked countless times, but has failed to receive a definitive answer – partly because it changes depending on the current state of the market and who is answering. Some argue it will never be settled as every business has different priorities and goals, but reshoring is a topic worth revisiting at intervals.

 

This is because earlier judgements can be assessed with the benefit of hindsight and, more importantly, it offers an indication of what businesses intend to do over the coming years.

 

It’s no surprise that the Far East, and particularly China, has become the most popular region for production. The supply chain is not only highly concentrated, but also very efficient, with some factories able to source, assemble and ship a product in less than two weeks. These capabilities have developed as outsourcing became more popular from around the 1980s, providing businesses with a quick and competitive model for bringing their products to market. This in turn has freed up time for other more important work, such as research and development. Aspects of what has made this approach so attractive have been placed under greater strain in recent years, however, leading some to consider bringing manufacturing ‘home’ or, at least, closer.

 

 

 

 

Dividing opinion

This is not a new phenomenon. Governments have actively promoted the reshoring case, either directly with funding or with tacit approval from those who would like to see more products designed, built and shipped from the country in which they were originally designed. Critics, however, argue that businesses can realistically compete on quality only when going up against the now well-established Chinese factories with lower labour costs and faster turnaround times. This has led some to conclude reshoring is mainly a political project without any real commercial merit.

 

Is this a fair assessment? Supporters of outsourcing will argue that it is now a very different prospect compared to its earliest days – particularly when it comes to PCBs. Quality has improved considerably, both in terms of components and overall build, manufacturing cycles are more consistent and OEMs will work closely with partners to secure better traceability. Communication and time zone differences continue to be a challenge and these issues have been brought into sharper focus since global supply chain disruption began to take hold. It would be premature to suggest this is the sign of a permanent shift for the industry, but it is clear the case for reshoring has rarely been stronger than it is today.

 

Unsettling conditions

The best evidence in support of this claim comes from the US, which has been engaged in an ongoing trade war with China since 2018. The situation is driven by issues far beyond the electronics industry’s influence, but the tariffs imposed on each side have nevertheless exposed weaknesses across the supply chain and made it harder for businesses to source components and other raw materials needed for virtually all manufacturing. It has also made pricing less dependable.

 

While not a direct consequence of the standoff, the global semiconductor shortage is perhaps the best example of an existing challenge that has been made worse by strained relations between the world’s two biggest economies.

 

Now, the US government is taking matters into its own hands with the announcement of a $20bn factory in Ohio built in partnership with Intel. Securing access for domestic businesses and limiting dependency on foreign suppliers were listed as main reasons for the investment.

 

This may be an exceptional case, but it highlights a mood that can be seen in other parts of the world.

Research from the UK shows there was a growing appetite for reshoring long before the pandemic began to reshape traditional business models. A Lloyds Bank sector report from 2019, for example, found that 37% of manufacturers had already moved operations back home or were planning to over the next five years. Wilton International, a large manufacturing site in Teesside, reported similar sentiment. Almost 60% of businesses polled said the pandemic had “exposed weaknesses in the supply chain” and work should now be brought closer to home, while 32% said reshoring should be focused on “critical supplies”.

 

Given the highly connected nature of today’s economy, and the presence of electronics in many first response items, it is fair to assume PCBs now fall within this category.

 

These figures may be surprising, especially as outsourcing is still preferred by the majority of OEMs, but its advantages are no longer clear cut. In the 1980s and 1990s, businesses could depend on much lower labour costs and stable access to a range of popular manufacturing facilities. Any downsides of moving work overseas were ultimately outweighed by the savings, and therefore bigger profits, on offer through a more competitive production model.

 

Today, those assumptions do not hold as firm under closer inspection. China and other popular locations for outsourcing have grown rapidly in the intervening years, which in turn has driven up production costs and closed the gap with other, historically more developed, nations. Average hourly wages in 2016, for example, hit $3.60 in some areas of China, representing a spike of 64% when compared to just five years earlier. At the same time, manufacturing has become more capital-intensive, with the use of additive manufacturing and other time-saving technologies in turn reducing the overall importance of labour in cost evaluations.

 

Beyond the bottom line

Recent disruption has also forced businesses to look beyond the balance sheet and assess the full cost of production door-to-door. This directly supports the case for moving manufacturing closer to the point of demand, where innovation and the adoption of new production techniques can be applied quicker when compared to sending contracts overseas.

 

Working this way also satisfies the ‘proximity factor’, which some customers have come to expect with the advent of rapid shipping seen with some consumer electronics. Contract electronics manufacturers working on behalf of a client may still have to source their parts from overseas but, providing they have effective inventory management, will usually fulfil orders more efficiently than those based further afield. This is because they will be closer to a product’s final destination and will be able to make changes quicker should a problem be found during testing.

 

For some, this point is persuasive enough, but there are other key points influencing an OEM’s decision to reshore, particularly when it comes to PCB assembly. Arguably, the most important factor is the greater control businesses and their subcontractors have when all operations are domestic. Improvements to a PCB design can be made quickly when engineers are working closer together, with a lower chance of miscommunication when time zone differences and language barriers have been removed. This capability has been a competitive advantage for businesses since factories put many important parts on allocation. A specialist electronics manufacturer can use its in-house knowledge to source credible alternatives for customers, circumventing the long lead times that have put even household brands on pause for much of the last two years.

 

Quality control is another area where reshoring can pay dividends. Many Far East facilities boast a high standard of workmanship, but it is not always guaranteed. Some may have access to better components and teams, while others may even be using the grey or counterfeit market alongside low-skilled workers to keep costs down. Ultimately, products cannot be shipped if boards arrive with obvious build errors or substandard components, adding further delays in a market that is already experiencing huge backlogs and losses running into billions of dollars. This is not only inefficient, but undermines the reason for offshoring work in the first place.

 

Domestic suppliers, on the other hand, tend to work with vetted factories that must meet minimum quality control and workplace standards before pitching for tenders. Sourcing parts only from a network of approved factories that comply with ISO 26000, for example, may sound counterintuitive, especially during a supply squeeze, but it offers customers the assurances they need to place orders months, or even years, ahead.

 

These points demonstrate some of the basic advantages of reshoring, though they still overlook the inherent risks associated with manufacturing across long distances in a post-pandemic market. Air and sea freight, for instance, are now significantly more expensive than they were in 2019 and the volatility around raw materials shows no sign of abating.

 

Whether these problems will further reshoring’s cause or, at least, drive more ‘nearshoring’ remains up for debate. What is now clear is that the cheaper option is not always best for PCB design and assembly – especially in a market defined by uncertainty.