Sue MuchaCalculating costs to move physical gear is much simpler than predicting inefficiencies of new locales.

As I write this, a trade deal with China that will eliminate the tariffs appears to be in development, but China is continuing to talk tough. The tariffs are causing significant pain to manufacturers in both the US and China, so I suspect some type of deal will happen eventually. In the meantime, the tariffs motivated many companies to look hard at the geographies involved in their outsourcing strategy. Some OEMs have moved or are in the process of moving some of their business, and a much larger number are thinking about it. I think it is important to carefully weigh the pros and cons.

The potential benefits of moving include:

Labor costs increase over time in all markets as labor skills and demand for that labor increases. Normally as that happens there is a concomitant increase in automation and other drivers of productivity, but that may not completely cancel out the labor cost increases. Reevaluating low-cost regions every few years to determine where they are in this evolution is a good idea. Case-in-point: Manufacturing costs in Mexico are on par with China now because the latter has been enacting wage increases for a number of years. When all cost factors are considered, China and Mexico are at cost parity in most cases. If tariffs are considered, Mexico has a significant cost advantage if product is exported via the maquiladora program instead of NAFTA. Vietnam, Malaysia and Indonesia all have lower costs than China, and eliminate the current China tariff situation, in most cases.

This level of reevaluation also can help identify projects that may be a better fit for a different region due to volumes, logistics or stage-of-product lifecycle.

Consequently, the analysis process that many companies are engaging in is not a waste of time.

On the other hand, moving purely to avoid tariffs opens the door to significant added cost and risk. Tariffs are typically a transitory tool that often drives changes in market dynamics. Consequently, the cost model that made economic sense for a move can change with the stroke of a pen. While identifiable costs such as nonrecurring engineering, tooling and the cost of moving custom equipment or raw material inventory can be calculated in any project move decision, the softer costs of internal staff time and learning curve inefficiencies are much harder to predict. A move predicated entirely on tariff avoidance will seem reactionary and costly if tariffs disappear six months after they are enacted.

Another area of concern is material availability. Lead-times are not improving, and allocation is done on a company and regional basis. While there may be some order “region-shifting” going on under the table, moving to a new region can change the component availability situation significantly. It is very important to understand whether the contract manufacturer and/or your company have any allocation issues in the proposed new region that aren’t present in the current one.

Unanticipated project transition delays should also be considered. If a large number of OEMs want to move at once, two things will happen. First, there may delays in exporting custom equipment, such as functional testers, in countries losing large amounts of manufacturing. Governments don’t add personnel or improve operational efficiency to help companies leave. Second, contract manufacturers in countries that are more favorable under the current tariff situation may overpromise. Often this isn’t by intent. Contract manufacturers don’t sell to one company at a time, and the OEM evaluation process often takes months, so in normal situations contract manufacturing sales teams are often talking to more potential customers than they would have the capacity to immediately handle.  If several customers demand to move at the same time new business starts booking faster, facility capacity or resource availability could become a short-term issue, slowing production ramps.

Tariffs are not the only cost factor to consider. For example, Mexico just elected a new president to a six-year term. Whether his policies will be business-friendly or not has yet to be determined. An unchecked pattern of Central American migration could also dramatically change the attractiveness of Mexico in terms of security or human rights track record.

Changes to US tax policy could be very favorable if tariffs are eliminated. But tax policy can change if there is a power shift in Congress or the presidency.

The bottom line: It is impossible to know the future. The changing political landscape makes outsourcing strategy analysis a good activity. However, a strategy decision based solely on tariff mitigation or political tax policy will likely have some negative consequences, particularly if the tariffs or tax policy changes are short-term.

Conversely, a strategy that outlines all costs and risks, plus considers the risk factors associated with timing the move at a point where many companies are doing the same thing, is more likely to result in longer-term cost reduction with fewer surprises.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to EMS companies, and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services; smucha@powell-muchaconsulting.com.

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