Shipping slipping out of control
26 April 2010
Are the costs of offshoring making outsourcing untenable?
Being based in Western Europe, there have been many arguments put forward as to why Western European manufacturing is better than the ‘low-cost geography’ options. It is the highest quality, say the manufacturers from Western Europe, it is the most flexible, there are no obstacles to overcome in terms of language and bureaucracy are other common favourites and transportation costs are another.
All of these were valid in the past and while some can still be factors they become less so as time goes on. Some of the quality of bare or populated boards from China can be variable. But poor quality suppliers tend to be dropped in favour of those that are tried and tested in the same way as they are in Europe or America. The best will survive and prosper. Similarly with flexibility, if engineering changes need to be made frequently, or batch sizes might alter at the drop of a hat, then it probably pays to have more local partners, but in general a good manufacturing partner, with the flexibility that entails, is likely to be good wherever you are.
In general, then, I am sure that the trading and technical environment across all nations will move towards an equilibrium and the consequences of outsourcing to another part of the world will become increasingly transparent.
There is an exception to this though. Shipping. One manufacturer in the UK recently told me that his shipping costs had risen by 75% in the last eight months. He was only buying components from the Far East but it had still hurt his corporate pocket. If it had been assemblies or finished products he was buying the consequences would be far more significant. This really is emerging as a problem for many companies. The main reason for manufacturing in China is to reduce cost and if that cost is fluctuating it is bound to throw the whole financial model out of kilter, and a steadily rising shipping cost could squeeze the profit margin, or increase the final cost of the product, to the point of being uncommercial. With oil prices looking that they are more likely to ‘fluctuate upwards than downwards in the future, the situation could get worse.
The point of course is that manufacturing close to the end market could become more attractive once more. The most exciting new market is clearly China itself, but for that large proportion of goods headed towards the more traditional markets of America and Western Europe there are signs that a blinkered choice to ‘made in China’ is being rethought. Many of the smaller EMS companies are prospering, while even some higher volume manufacture is returning. Moreover the resurgence of Eastern Europe and Mexico/Brazil as the ‘local’ high volume centres looks likely to continue. If this is the case it will be interesting to see how much of the overall volume will be taken up by the top-tier EMS providers, with their ability to globe-trot to suit demand, or by local indigenous EMS providers.
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