Thursday, April 14, 2016

The Regionalization of the High Tech Supply Chain

The speed of technology innovation is growing constantly, as technological products become more powerful and affordable.  Saying that, it has also been difficult, if not impossible, to find these products made close to home…unless your home is Asia.   This is not a recent phenomena but one that has been happening over the last few decades. 

Are we at the beginnings of a change?  Will Apple be alone in its decision to start producing some of its Mac computers in the United States? We all realize that these days the Macs are only a part of Apple’s business empire but the imagery is powerful.

The fact that Motorola followed suit with their announcement of producing the Moto X Smartphone in Texas could be an indicator of things to come.  

So the question to ask is; does that mean technology companies will be shuttering their overseas facilities and bringing manufacturing back to the US?  The answer is no!  

What is happening the regionalization of this industry?  It is not re-shoring but near-shoring, or in other words having production near the consumers.  

Some of the production in China and other parts of Asia will continue to serve that region while the production in South America and Mexico will serve the United States.  This is not even near-shoring but realignment.  

The primary reason for this is the cost differential has been shrinking.  In 2000 labor cost in the U.S. were 23 times higher than in China or other parts of Asia. At present the cost is only 8 times higher.  In addition, transportation costs are soaring in 2000 and before China produced items arrived in the United States costing 22% less than same items made in America.  At the close of 2011 that cost gap was only about 6%.  

Another reason was the complexity of the technology which may have dictated the need for production to be closer to Research & Development.  The complexity of the production process and continuous innovation required in the high tech industry commands close approximation between production and Research & Development. This development has caused some ‘opposite’ things to occur – a resurgence of technology manufacturing in Silicon Valley. 

Deciding where to place an R&D facility has become more complicated for two reasons – costs and training.  To offset those costs many companies are developing R&D facilities at the local market level to meet local demand and then expand globally.   

Yet another factor is the large supply of college trained workers.  The American intellectual wealth makes it easier to develop first of its kind products.    The United States has only 5% of the entire world’s population but has one third of the high tech researchers.  

There are three factors which need to be watched to see if they help or hinder this future.  They are the following:

1.      Intellectual property – Will the United States intellectual property continue to outweigh the labor cost savings?  How will technology development costs increase or decrease as a share of the total product cost? 

2.      Labor quality – Will labor quality become more important than labor cost?  The quality of the available work force will be determined by the quality of our K-12 education and the institutes of higher learning.   I am specifically referring to the STEM – science, technology, engineering and mathematics.  

3.      The states to be truly business friendly – Unreasonable government regulations are toxic to establishing new manufacturing operations.  Successful states are building cooperatives between university and industry to build the type of work force that will be required.

All locations should offer incentives to build and support new manufacturing facilities.  Areas in the United States which are newer to the high tech industry – those areas other than Silicon Valley, Boston and Austin – should offer the best packages which include tax concessions, economic grants, reimbursements and training partnerships with local universities.   

No comments:

Post a Comment