Reuters and other outlets have been reporting on plans of Taiwan-based Foxconn and Pegatron, among others, to explore manufacturing facilities in North America, as concerns about the ongoing US/China trade war and the Coronavirus pandemic continue to stress global manufacturing supply chains. For big companies like Foxconn, evaluating additional production for smartphones in North America is all about customer proximity and further complementing Asian operations as a risk mitigant.
At the same time, small-to-midmarket companies are focusing on a different priority of exiting China-based subcontracting altogether, in favor of building their own products closer to home, in North America. A growing number of companies are making this shift, enabling them to also gain greater control of production and product quality. Even after a vaccine is developed for the coronavirus, this question of “buy versus build” will still be an important one.
Not All About Tariffs
U.S.-imposed tariffs on imports from China get the bulk of the attention due to their political, headline-grabbing nature and immediacy. But in reality, the tariffs are just the most recent in a long list of issues causing companies to re-evaluate their dependence on subcontract manufacturing in China, including:
- Intellectual property concerns
- Quality control
- Increase in land costs
- Lack of control over production
- Supply chain delays
Any of these factors could pose an existential threat, whether a 20 percent tariff that further erodes already-tight margins or a botched order due to lack of quality control on the part of your subcontract manufacturer. As a result, subcontract manufacturing in China is currently less appealing than ever before. Some companies feel that the upside of lower-cost production in China isn’t enough to justify significant risk to their business.
Companies interested in alternatives to subcontracting in China are looking at the option of building product on their own, right in North America. While there are initial capital investment costs, and production costs can be higher (depending on location), you gain four key advantages when making the shift.
- The first is control and assurance that your product is the top priority. By manufacturing your own product, versus working through a subcontract manufacturer, you are back in the driver’s seat. You can implement exacting quality control processes or launch a new product line, depending on your needs. This is in contrast to working with a subcontractor, for whom you are just one of many clients.
- Second is customer proximity. By manufacturing in the USMCA region, you’re closer to your customers as well as to consumers in the market. This enables greater agility, such as the ability to quickly modify production lines for seasonal changes, shifts in consumer taste or to launch a new product. Without the month-long wait for the boat from China, that flexibility will give you a big leg up in customer responsiveness.
- Third is the protection of intellectual property. China offers few safeguards to your designs and concepts. It’s even more problematic when you work with a subcontractor, as you have almost zero insight into who else your supplier is working with or selling your ideas to. By moving to your own production in North America, you gain a lot more security and respect for the rule of law.
- Finally, by producing in the U.S., Mexico or Canada, you benefit from zero-tariff policy. No one knows how long the U.S./China tariff war will last or how it will evolve. By producing in the USMCA region, you take that uncertainty off the table. That alone will help a lot of executives sleep better at night.
Where To Start?
If you’ve never manufactured your own product before, shifting to a strategy of building product versus buying it seems daunting. But with the right guidance you can shift away from an over-reliance on subcontract manufacturing in China and manufacture your own product in North America.
To help companies make this transition, we formed Strategic Footprint, a firm that guides companies in evaluating all costs of manufacturing and delivery, so companies can build product on their own closer to home and take back full control of their brand. For example, we guided a major fishing rod manufacturer in moving production from a subcontractor in China to building their own product line in North America, drastically shortening delivery times, enabling direct shipments to consumers and reducing quality issues. On another occasion, we moved production of a component from a subcontractor in Taiwan to a manufacturer in the US.
Doug Donahue is principal of Strategic Footprint, a new firm that helps companies move from subcontract manufacturing in China, in favor of building product on their own, closer to home.