Apple’s recent decision to move production of the iMac line to the U.S. last week was clearly a surprise for many market observers. But the action clearly makes a lot of sense, according to Flextronics, a leading contract maker of electronics, in the light of the fact that the labor costs in China in particular and in southeast Asia in general are increasing, whereas factories in the U.S. can be more automated.
“I think, moving production back to the U.S. is a process, or it is a journey, almost. As our costs become pressured, it makes other choices more interesting. So, what that is going to do is probably push more work into Mexico. And, over time, as those costs continue to go up, you'll probably see more things get pushed back in the USA,” said Mike McNamara, chief executive officer of Flextronics International, at the Raymond James IT supply chain conference.
The production costs went up 20% this year in China and will continue to go up 20% a year for the next five years, according to Flextronics. The rates also went up in Malaysia and Indonesia by 30% and 40%, respectively, this year. Foxconn, the arc-rival of Flextronics, has already announced plans to use more robots at their mega-factories in China to cut costs.
Apparently, factories in the USA will be much more automated than in China, which will require change of some design procedures at product developers.
“As you see things get pushed back into the U.S., it is more than just having the right cost structure. You also have to design for more automation and more different kinds of productivity. So, it is an evolution; it is not just flipping a switch. You actually have to spend a lot of work in the design, all the way through to the manufacturing process, knowing where you are going to manufacture. So, I think it is going to take time,” added Mr. McNamara.
The head of a leading contract manufacturer believes that in the next five years the structure of the manufacturing market will change dramatically. China will cease to be the global factory and products will be assembled in different parts of the world locally. As a result, companies with global presence will become even more powerful.
“But I think with the costs continuing to go up around the world like they are, and with the cost in the United States staying relatively flat over the last few years, I would expect you would to see a little bit more coming back. So, that is kind of what I mean by opening comments, too, about the distributed worldwide system. As things do become more regionalized, if they do over time, we believe we are in a very, very advantaged position because we have such a strong footprint around the world,” stressed the head of Flextronics.