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Reshoring the offshoring

John Denslinger is a former executive VP Murata, president SyChip Wireless, and president/CEO ECIA, the industry’s trade association. His career spans 40 years in electronics

This month, John Denslinger explains how government incentives, geo-political risk, proximity to market, supply chain durability and sustainable energy are underpinning reshoring.

To understand the exuberance surrounding America’s reshoring initiative, one must appreciate the long history preceding it. Some 60 years ago, offshoring became the norm among US manufacturing companies eager to trim escalating labor costs. By today’s standards, automation in the ‘60s and ‘70s was not that good. It was expensive and inflexible with under-performing results. On the other hand, relocating operations to low-cost countries offered immediate savings from day one especially with labor-intensive assembly. When the maquiladora program was introduced in 1964, that made the offshoring decision a clear-cut winner.

By definition, a maquiladora is a factory located in Mexico owned and operated by a foreign entity. Imported raw materials are assembled for intermediate or final goods and then exported back to the country of origin. US tariffs apply only to the value-added assembly. It was designed to encourage new foreign investment in Mexico addressing both chronic unemployment within Mexico as well as stimulate the domestic market for more goods and services. From the US perspective, the maquiladora offered low-cost labor and a supply line adjacent to America’s large consumer market. The concept and subsequent iterations seem to have exceeded most expectations. By 2021, maquiladoras accounted for 58 per cent of Mexico’s manufacturing GDP and 48 per cent of industrial employment according to the Dallas Federal Reserve.

By the turn of the century, the search for even lower costs pushed many companies to consider Asia. China was first to establish a Special Economic Zone (SEZ) in Shenzhen. The SEZ encouraged foreign investment in local companies through relaxed planning regulations and generous tax incentives. For American based companies, China also had the attractive advantage of low-cost labor and a ready-made supply chain network exceeding that available in Mexico. Apple may not have been the first to manufacture in Shenzhen, but as a bellwether company it certainly validated China’s ability. It wasn’t long before China became the tech world’s manufacturing center. Even today, China remains a highly integrated trading partner.

But nothing lasts forever. Trade wars, pandemic fall-out, geo-political tensions, decarbonization commitments and multiple unforeseen disruptions in key supply chains mark the last five years. Reshoring America is still the obvious trend, but Mexico, India and Southeast Asia have also emerged as options. According to BCG, more than 90 per cent of North American companies have relocated production or sourcing during this period seeking lower cost, stable business environments, shorter customer lead times and increased flexibility should disruptions occur.

Nowhere is reshoring more evident than in the computer and electronic product manufacturing sub-sector (NAICS 334), specifically semiconductors, wireless communications and printed circuit assemblies. The recently passed $280B Chips Act facilitates a domestic semiconductor manufacturing ecosystem. The concept is quite comprehensive in scope including fabrication, R&D, assembly and packaging. There is also a provision to build-out the necessary supply base to support it. Investment by domestic and foreign companies is surging as well.

And so it moves full circle. Sixty years ago, America saw Mexico as the offshoring destination for low-cost manufacturing. Twenty-five years ago, more sophisticated assembly launched China as the new offshoring destination delivering both low cost and a critical supply chain network. Now companies are aggressively reshoring influenced by government incentives, geo-political risk, proximity to market, supply chain durability and sustainable energy. Low cost is still a primary factor but reshoring with smart factories minimizes direct and indirect labor content. Reshoring has arrived.