Where Is the Best Place to Manufacture Electronics Products and Prototypes?

Electrical engineers and technology startups must decide where to manufacture their prototypes or final products. This is not a simple decision.

While “Made in the USA” is still popular among its domestic consumer base, U.S. labor costs remain relatively high compared to other major manufacturing economies. The U.S. maintains a high-value manufacturing sector, but steep production costs lead most companies to contract manufacturing services (CMS) abroad.

 

Image used courtesy of Adobe Stock

 

If your company is considering contract manufacturing services today, two countries immediately come to mind — China and Mexico. To determine which country provides the best CMS options for you, consider a simple two-step decision-making process:

     1. Identify your engineering and purchasing needs

     2. Compare and analyze costs and benefits

If you already established manufacturing services in China, moving all or most of your production elsewhere does not make sense. But if you are an engineer or a technology startup based in the U.S., the costs and risks of manufacturing in China may be too high. Mexico may be a logical alternative.

As market volatilities, such as pandemic shutdowns and shortages in microchips, semiconductors, and lithium, continue to disrupt the global supply chain, uncertainty, especially in the realm of electronic manufacturing, appears to be the new normal. Therefore, emerging technology companies ought to embrace regionalism as the future.

 

Identifying Engineering and Purchasing Needs

The first step in choosing your CMS partner(s), whether in China, Mexico, the United States or anywhere else, is to identify your engineering and purchasing needs.

Are you a multinational corporation (MNC) on par with Apple or IBM? Or are you a nascent technology startup?

Perhaps, you are an electrical engineer who prefers to build and design independently. Focus on determining your stage of development.

Are you prototyping, or are you planning to scale up to low-, medium- or high-volume production? How vulnerable is your business model to present and future disruptions in the supply chain? How are the COVID-19 pandemic, climate change, energy crises, supply chain shortages, and geopolitical tensions impacting your business’s success?

Most MNCs relying on CMS operate some, if not most, of their production in China. Most do not plan to exit totally, let alone permanently [1]. Even as labor, rent, and shipping costs increase, moving production outside of China jeopardizes safety and quality control investments already made [2]. However, due to interference within the global supply chain, even MNCs take stock of other viable offshoring options.

Image used courtesy of Adobe Stock

 

But China, which U.S. business leaders credit with maintaining political stability, now struggles to ensure economic growth and stability in the face of several global crises. Despite these issues, MNCs are big enough to handle any number of supply chain disturbances. What they cannot afford, however, is a loss in market share, as well as their investments made toward China’s industry 4.0 infrastructure.

Solo engineers or startups, on the other hand, usually need to prioritize prototyping designs and scaling operational capacity up to low-or-medium-volume production. They also want and need quality control, but high production costs, supply chain disruptions, and trade barriers are existential threats. Additionally, there is a hyperawareness that new CMS partnerships could become future competition [3]. Accessibility, affordability, and reliability are, therefore, essential to engineers and tech startups.

U.S.-based companies may find Mexico more suitable for their business needs. The labor, real estate, and shipping costs are all lower than in the US [4], China, or other Southeast Asian economies [5].

Additionally, more than a decade of foreign direct investment (FDI) into Mexico went toward industry 4.0 infrastructure, quality control, and workforce development [6]. You will receive high-quality production in Mexico at a low price.

Just as some MNCs are diversifying their operations in Southeast Asia, U.S. engineers and startups should consider nearshoring production closer to home. Doing so would limit exposure to present and future supply chain disruptions and better serve U.S. consumers.  

 

Manufacturing in the United States

This article does not intend to disparage or dissuade U.S. manufacturing. Quite the contrary— before choosing China or Mexico, engineers and startups may reconsider the value of being “Made in the USA.”

American-made is still in demand [7]. Nevertheless, the U.S. manufacturing sector struggles to grow as a percentage of gross domestic product (GDP) [8].

But despite trade wars (past, perceived and potential), rising inflation, unemployment, and substantial job losses in manufacturing, the U.S. remains the largest economy in the world. For years, the U.S. received the highest inflows of FDI [9], leading to large investments in high-value design, research, and development jobs in science, technology, engineering, and mathematics (STEM) fields [10].

Manufacturing as a percentage of GDP is small and economic growth is low, but labor productivity remains higher compared to manufacturing economies in Southeast Asia [11].

A U.S.-based engineer or startup specializing in high-end technology may consider spending more on labor and rent for higher productivity. On top of overwhelming investments made in STEM, U.S. consumers may also be willing to pay more for new “American-made” products.

 

Key Takeaways: Contract Manufacturing Services

When determining whether or not to contract your manufacturing services in China or Mexico, conduct a comparative analysis. Identify your engineering and purchasing needs first, and then compare and analyze the costs and benefits of both countries.

Benefits are highlighted by indicators of growth, such as GDP, percentage of economic growth, and manufacturing as a percentage of GDP and economic growth. Costs of conducting business in either country include labor, rent, and shipping costs, as well as trade barriers like tariffs and content requirements in trade agreements.

While MNCs tend to value the quality of manufacturing in China above all other opportunities despite new global uncertainties, that is most likely due to their own early investments in China.

However, even MNCs are increasingly choosing to operate in Mexico due to its proximity to the US consumer base.

Before the global pandemic, Mexico had demonstrated to the world that inflows of FDI would not only grow manufacturing as a percentage of its GDP and growth but also develop industry 4.0 infrastructure and a high-skill workforce. No matter who you are, what kind of business you run, or where you manufacture, new uncertainties in the global economy suggest embracing North American regionalism.

 

References

1. Goh, Brenda, “Most U.S. firms have no plans to leave China due to coronavirus: survey,” Reuters, 16 April 2020
2. Chang, Ailsa, “Why Many U.S. Companies Have Kept Production In China And Have No Plans Of Moving,” NPR, 30 August 2019
3. Arrunada, Benito and Vazquez, Xose, “When Your Contract Manufacturer Becomes Your Competitor,” Harvard Business Review, September 2006
4. “Manufacturing in Mexico: Labor in Mexico,” Tacna Services, Inc., 2019
5. Szmigiera, M., “Manufacturing labor costs per hour: China, Vietnam, Mexico 2016-2020,” Statista, 30 March 2021
6. Read, Jennifer, “Electronic Manufacturing Trends in Mexico,” EMSNow, 28 March 2019
7. Guta, Michael, “60% of Customers Would Pay More for Made In America,” Small Business Trends, 21 January 2020
8.  “Value Added by Industry: Manufacturing as a Percentage of GDP,” Federal Reserve Bank of St. Louis, 30 September 2021
9.  “Foreign Direct Investment in the United States 2021,” Content First, LLC, Global Business Alliance, 10 September 2021
10. Mazachek, Kara, “FDI in High-Tech: Innovation and Growth in The United States,” tradeology, The International Trade Administration, 05 February 2020
11. Kemp, John, “Column: China’s productivity more important than its aging population,” Reuters, 12 May 2021