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Mid-market providers are responding to OEM desires for more regional approach.
As wages continue to rise in China and fuel costs escalate worldwide, some North American manufacturers are reevaluating their global operations to determine if production locations are optimal. This is reinvigorating discussion among EMS providers over whether China or Mexico is the best site for lower-cost production.
Both locations have inherent pros and cons, but unlike a decade ago when the World Trade Organization welcomed China as a new member, a comparison of China with Mexico can no longer be based solely on input costs, i.e., labor and transportation. Global electronics supply chains have evolved to be much more complex, and OEMs are demanding faster and more solutions-focused services from EMS suppliers. At the same time, the economies of North America and Asia have changed dramatically since 2000, with growth slowing in the West just as thousands of poor Chinese people are joining the middle class.
The decision for EMS providers, then, turns on cost strategy and customers; the best location, under the best circumstances, is the one that satisfies both.
According to Sonny Newman, president of Reno, NV-based Electronic Evolution Technologies (EE Tech), the EMS company’s Empalme, Sonora Region, Mexico, location gives it a unique strategic advantage over competitors without a Mexico manufacturing location.
“The strategic advantage that our customers enjoy with us in Empalme versus Reno is a lower labor and overhead cost out of our Mexican production facility,” Newman says. “By taking a few more weeks to have the product built in Empalme versus Reno, a customer can save a substantial amount. Unfortunately, the material cost is the same, and that represents a large percentage of the builds, but when you are producing thousands or even hundreds of thousands of units, that savings adds up very quickly.”
To deliver this savings advantage, EE Tech works collaboratively with The Offshore Group to run its Mexico operations. The Offshore Group is what is known in Mexico as a “shelter,” or outsourced manufacturing support company.
“The strategic advantage that we have operating in Mexico is made possible by our partnership with The Offshore Group. They handle the functions of our operations that, although not related to actual manufacturing, are critical to our being able to be and remain up and running profitably. Because they handle things like managing our payroll and worker benefits, our import and export operations and worker transportation, as well as maintaining our manufacturing facility, we can focus on our manufacturing mission, which is where we add lasting value for customers.”
Doug Besse, executive vice president, global supply chain and Asian operation manager for Creation Technologies, a global EMS provider based in Canada, also says his company takes a customer-centric approach to making plant-location decisions.
"Creation Technologies looks at it and says that we really need a Mexican manufacturing location for different reasons than we need an Asian location,” Besse says. “It's different customers looking to do different things. Large North American OEMS are looking at Asia and saying, ‘We want to be in Asia, so we should manufacture in that location.’ Then there are OEMS in North America who say, ‘I have a high labor-cost concentration in my product, but my market is in North America, and I want to be a market leader in North America’ – they tend to look at Mexico as a manufacturing alternative."
Beyond the 'China hype.' According to a 2011 report based on a research project by electronics supply chain consulting firm Charlie Barnhart & Associates, “China and Mexico both possess many world-class manufacturing facilities capable of producing any electronic product being designed today. The question, therefore, is not one of capability but fit. Which country best fits the manufacturing needs of a particular OEM? For OEMs selling high-volume products in the 3Cs (consumer, computer, communications) sector, the answer is undoubtedly still China. For mid-market USA-based OEMs selling lesser-volume products, the answer has become less clear. Many of these companies have been caught up in the China hype only to have become frustrated.”
That frustration stems from multiple factors: steadily rising wages, reduced export tax credits, longer lead times due to greater distance and more shipping requirements; language and time-zone barriers; and the uncertainty of doing business in a country that –although becoming more Westernized economically – remains a Communist country with an authoritarian government that keeps a heavy hand in commerce.
“The composition of the EMS markets in China and Mexico are quite different,” according to the CBA report, China vs. Mexico: An Objective Comparison for Midmarket Electronics OEMs. “While the Chinese market is comprised of both indigenous and global companies, Mexico is comprised almost exclusively of non-Mexican service providers primarily from the United States.” Table 1 shows the top 10 EMS companies from 2011 and whether they have a facility in China or Mexico.
Table 1. Top Tier EMS Footprint
Company China Mexico
Hon Hai Precision Industry (Foxconn) X X
Flextronics X X
Jabil Circuit X X
Celestica X X
Sanmina-SCI X X
Cal-Comp/Kinpo X X
Benchmark Electronics X X
Plexus X X
Universal Scientific Industrial X X
Source: CIRCUITS ASSEMBLY Directory of EMS Companies
For mid-market EMS providers, though, it’s expected that EMS production in Mexico is increasing and will continue to do so, according to CBA. The past decade saw a dramatic shift in electronics manufacturing to China in pursuit of lower assembly costs, including for LV/HM (low-volume/high-mix) assemblies. But CBA and others have documented a growing return to a regional approach by some North American-based OEMs that is benefiting Mexico.
“Our research has identified a trend of electronic OEMs returning to a regional approach to their manufacturing,” states the CBA report. “Regionalization is defined as when OEMs build their product in the region into which their product will be sold. In other words, they choose to build in region for region.”
The number of EMS companies operating in China, both indigenous and foreign owned, is still too vast to list, according to CBA. The list of EMS in Mexico in comparison is fairly short (Table 2). (This is not an all-inclusive list, but does reflect what CBA believes to be the vast majority of EMS companies currently operating a facility in Mexico.)