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Outsourcing and off-shoring: where, and why

EDN.COMMENT

The dis-integration of the electronics industry’s design-andmanufacturing flow has been one of the major themes of the past few years. We have come to accept that design, component sourcing, manufacturing and test have become distinct functions, any combination of which may— but these days more likely may not—coexist on the same site. And that, if they are not co-located, then they are just as likely to be on the other side of the planet as they are to be in the same area. For designers, who may have watched their employer out-source its production, there are natural concerns: where will my company’s design effort be located in future? Is the fact of designing for a regional market enough incentive for my company to keep my job function here?

An insight into the pressures that shape the decisions of a company operating on the global scale comes from a discussion my US-based colleague Margery Conner recently had with Mike Wagner, vice president of marketing at Cherokee International. Cherokee (www.cherokeepwr.com) is a maker of ac/dc- and dc/dc-power supplies, and has an established globally distributed operation: headquartered in Tustin, California, the company has design and manufacturing centres there and in Wavre, Belgium. For high-volume product lines, Cherokee has until now manufactured in a location that a European company is less likely to use: it has a facility in Guadalajara, Mexico. It also manufactures magnetic components in India.

Recently, Cherokee underwent a re-evaluation of its operations, so it performed a global analysis of where to locate its next generation of manufacturing and design. At first glance, Mexico seemed the logical place to expand design and manufacturing. However, considering proximity to the customer, the opportunity to call on the Asian market, and other factors, Cherokee decided to build its own facility in Shanghai, China. Margery Conner asked Mike Wagner—himself an electrical engineer who started out as a power-supply designer—what led to his company’s change of manufacturing strategy.

Why, when the company already had a low-labour-rate base in Mexico, did Cherokee look at moving manufacturing from Mexico? Aren’t Mexico’s labour rates among the lowest in the world? What, apart from cost of labour, were the other key influencing factors— they must have been significant, because you already had an operating facility in Mexico? Wagner replies that, “Yes, Mexico has low labour rates—not the lowest—but there are other important factors to consider, and Mexico just didn’t come up on top when we factored in the other aspects. In addition to point of consumption and supply- chain location as two main issues, we also made a consideration for finding engineering talent that could support a future design centre. Also, more North American and European customers today are doing their system integration for their end products in China. Finally, we expect to call on the Asian market, which is growing considerably. We believe that Asia will become a significant consumer of our power supplies”.

With so many other electronics manufacturing operations moving to China, was China not an obvious, straightforward and automatic choice of location, simply on considerations of labour costs alone? “Actually, no,” says Wagner, “because China’s labour is [also] not the lowest priced. For example, India has marginally lower labour rates.” Why, then, not build in India, which has a famously excellent engineering-education system, and, besides, Cherokee had some infrastructure there already? To this point Wagner says, “Yes, but India’s educational strength is more known for software engineering rather than analogue engineering. China has a much stronger power-engineering educational system, and analogue expertise is the key [for Cherokee’s business]. Plus, we don’t see India as being nearly as robust a customer in the future for power-supply consumption. India also doesn’t really have an electronicssupply chain. China is a self-contained system of en-gineering, parts, labour, and customers”.

Building a facility is always a gamble. Why didn’t you go with contract manufacturing (CM) and “ease into” manufacturing in China? “We have avoided contract manufacturing because we feel that we can better control our quality by having common processes, equipment, and training across all our facilities. That way, we own the entire manufacturing process and do not depend on a CM whose schedule is fluctuating and subject to other customers the contract manufacturer supports.”

How do engineering costs compare between the US and China? “Chinese engineers cost about a third of US engineers, but the higher priced US engineers also have higher level skills sets.” To which Wagner adds, “- at least, for now.”