Baseless assumptions led us astray from regional strategy

For many reasons, Technology Forecasters has been predicting a return to the regional sourcing strategy that was the hallmark of electronics manufacturing before Y2K and the rush to build anything and everything in China.

(For example, see the May article by Bruce Rayner, TFI vice president and director of consulting and research, in Manufacturing Business Technology, or the conclusions from my presentation at the Spring Quarterly Forum last month: “Recalibrating the Cost of Outsourcing/The Changing Landscape of Outsourcing.”)

In this context, it is useful to review the assumptions – unfounded it turns out — that led the industry away from the regional strategy. I offered this view at the Spring Quarterly Forum last month. These unfounded assumptions, which became rationalizations to justify the move to China, have mistakenly become imbedded in the industry’s collective perception. A mindset correction is needed.

Here are the ones I encounter repeatedly.

Assumption: Systemic quality problems in Mexico and/or Eastern Europe, or products manufactured in Mexico or Eastern Europe are of poor quality. Fact: No statistically significant data has ever been found to support this assertion.

Assumption: It is always cheaper to manufacture products in China and ship them to their point-of-sale than it is to build them in a higher-cost labor region. Fact: Our Outsourcing Navigator Series modeling has consistently shown that on a TCO basis this isn’t true in all cases — and almost never true if materials are sourced at their point of lowest cost and assembly is done regionally.

Assumption: It is necessary to build in China to penetrate the huge potential market in China. Fact: A review of publicly traded global OEMs financial statements clearly indicate this approach has not come to fruition.

Assumption: Cross-hemispheric strategies (i.e., using emerging, remote lower-cost labor to build electronics) provide social and economic benefit to all parties involved. Fact: Given the state of the environment, the global electronics industry and most of the associated economies this presumption seems questionable at best.

Just because everyone else is doing something (like jumping off a bridge) doesn’t mean it is a good idea. Isn’t that something our mothers taught us?

You might know of other baseless assumptions – or you might disagree with these. Either way, let us hear from you.

Posted by Bill Roberts, May 8th, 2008