From the Publisher: What Is Regionalization?

By Eric Miscoll, EMSNOW Publisher

Build in region for that region!  There are lots of other terms that have been floating around about this idea for the past few years: on-shoring, re-shoring, right-shoring, repatriation, and so on, but the definitive trend in the electronics industry is regionalization.

The globe can roughly be divided into three regions, Europe, Middle East and Africa, or EMEA; Asia, and the Americas.  In each of these regions, there are lower labor cost countries that have developed the infrastructure and supply chains to perform electronics manufacturing for the end customers in those regions for certain types of products.

The politicians probably want to take credit for it, but the trend has been evolving for more than ten years because of the logistics and costs of managing complex cross-continental supply solutions. OEMs quickly learned that the #1 risk to their supply solution was the number of time zones they put between where the order was issued and where it was fulfilled.  Some OEMs experienced spectacular catastrophes early on in this outsourcing adventure we’ve all been on together. These disaster stories spread like legends among the decision-makers and consultants trying to figure it all out, and once burned, the hand is less likely to approach that particular flame. The 2009 financial meltdown contributed to these challenges when some OEMs found the Chinese facility they had been doing business with shut down and empty along with about 10,000 other companies that evaporated overnight. Remember that? Good times.

After these painful experiences, OEMs began to do a more nuanced analysis of the Total Cost of Outsourcing, taking into account all the costs, and using a more sophisticated model than just looking at the unburdened labor wage rate. There are three main elements of this analysis:

  • Global Pricing, which is the price paid to the EMS/ODM for the services provided.
  • OEM Internal Spend, which is the internal cost to manage outsourcing, and takes some effort to unpack, but must be included for a full cost analysis.
  • Geographic Risk, which is the risk associated with the solution selected, and is a number that can be monetized and included in a thorough analysis.

Granted, this type of thorough cost analysis takes a deep understanding of the country under consideration, including the politics, infrastructure, labor pool and so forth. It also involves a deep understanding of the OEM’s own internal processes and costs. When this is done, it becomes clear that for certain products in certain industries, a regional approach makes the most sense.

So for EMEA, that means building products in Eastern Europe; in the Americas, Mexico is becoming the state of the art for automotive and appliances especially; in Asia, China has the market for small consumer electronics of course, with India, Vietnam, Malaysia also vying for the crown for products for Asian consumers.  Which specific area gains traction changes over time. For example, for a time, Ireland was the low labor cost region for EMEA, but that has shifted somewhat. Tax laws, other political incentives, labor pool issues and just the momentum that comes from the larger programs affect these shifts.

Furthermore, a region will get a reputation in the industry for less quantifiable factors and this influences the decision-making process. For example, for a time early in the outsourcing journey, the rumor circulated that the quality of the products coming out of Mexico was in question, and that was thought to be why people began to rush, lemming like, to China. After a time, and many failed projects later, managers started to rethink that assumption.

There are many positives for regionalization, not least simplicity. Shorter, simpler supply chains with fewer nodes are inherently more robust, less susceptible to disruption and risk. What’s more technology like additive manufacturing or 3D printing have the potential to allow data to be shipped rather than parts, with the finished assembly being printed closer to the consumer.

Under regionalization China will continue to thrive as a global manufacturing site for smaller electronic products and a regional manufacturing site for larger products.  The true testament to regionalization is that Chinese companies have established manufacturing facilities in Mexico to serve the US market.  We hope that this rational mindset remains in effect, but if history teaches us anything, it’s that rational thought sometimes goes out of fashion.