The decline in manufacturing in the U.S. involved not only a transfer of money, but also of critical know-how, says Jens Gamperl, founder and CEO of Sourcengine, an online marketplace for electronic components. Bringing back manufacturing of high-tech products such as microchips would require a resurgence in technological skills that would take many years to achieve; not to mention massive injections of capital expenditure. These two factors taken together make reshoring of chip manufacturing unlikely, at best. In the meantime, Gamperl says, we better learn to recognize the dependence we’ve developed on countries such as China, and the lesser manufacturing hubs such as those in Malaysia, Taiwan and the Philippines, rather than fantasizing about rebuilding a strongly industrialized America.
“We followed the money, then all of a sudden we see dependency, and we’re trying to reverse it,” Gamperl says. “But if China stops shipping PCB (printed circuit board) products tomorrow, it’s over.”
The background to this story is about a lot more than companies simply building or buying production capacity abroad. There has been a whole, complex devolution of manufacturing processes over the last couple of decades. For example, Apple got Foxconn to build its computers, phones and tablets. “Foxconn became big because Apple was no longer a manufacturer,” Gamperl says. “It became a design company.” This strategy hastened the move to focusing so tightly on cost-cutting, he argues, since it was all being done by third parties. China rose to prominence first, initially mostly because labor was cheap and it was open to the west, but increasingly because it had a great talent pool, Gamperl argues.
After that, manufacturing expanded to other countries with young, cheap, often well-educated labor, such as the Philippines and Taiwan.
In the meantime, Chinese wages were rising, but so was something else that would allow them to keep a firm hold on manufacturing competitiveness: knowledge. Gamperl points to the savvy rules implemented right from the get-go, that any foreign investment in Chinese companies had to run along the lines of a joint venture. That meant many examples of Chinese companies simply absorbing knowledge about products and developing their own. Lax or non-existent intellectual property protections made it easier. “There have been different reasons for reshoring,” Gamperl says. “But know-how transfer is a bigger reason in the long term than pricing.”
And then, during the extraordinary events of 2020 and 2021, logistics became more of a problem than ever before, making the distances traveled a hampering factor. “Just shipping goods across the Pacific became a nightmare, so whatever we thought was cheap because of production costs became expensive because of delays,” observes Gamperl. “What looked cheaper in the beginning was more expensive in the end.”
The solutions to this set of challenges are complex, Gamperl warns. “In the situation we are in, there’s no quick fix,” he says. He points, for example, to the backlog of production for the biggest manufacturer of chip-making machines, ASML. The machines take six to nine months to manufacture, and there is currently a three-year backup of orders. “But, in the long term, the trick is to find the balance,” Gamperl says. “I’m not a fan of shifting 180 degrees and bringing everything back to the United States.” He says the best approach is to use that dispersed specialized knowledge that has proliferated elsewhere, and then complete the last parts of the manufacturing process in the U.S. “So, when product is ready, it’s already onshore.”
Gamperl points to the way manufacturing shifted in Europe when the Berlin Wall fell and formerly Soviet-controlled countries opened up for supplying the West, moving to Eastern Europe. Then, of course, it moved further to China. But the automotive industry, for example, quickly realized this was too far, and re-focused on such Eastern European nations as Hungary and Poland.
In the case of the U.S., there are similarities to the move to manufacture goods in Mexico. Guadalajara has become a major outpost for electronics production, Gamperl says. “They have very good talent there, with a young population, fast-growing,” Gamperl says. He also views Costa Rica as a country with good education and lower crime, and therefore a good place for manufacturing hi-tech goods.
“What’s unique to chips is that you need a skilled workforce, and these items can’t be made in one factory. There’s a front end and a back end,” he explains. He describes the path that chips finished in Texas first go to Japan for surfacing, and then packaging in China. “It’s important to understand there’s a journey of how chip production works. What happens here right now is more on the back end, in Texas and Arizona. Intel is putting billions into facilities for the last step of manufacturing, so that when product is ready to ship it’s in the U.S. I think this is where the future is.”
“We used to think of supply chains in terms of, ‘how much cost can I take out of it? We must reduce costs!’” Gamperl says. “Now, there’s the realization that the supply chain is part of the strategic structure of the business. It’s come to the top of everyone’s mind. It used to be a case of, ‘just go get me my parts and don’t worry about where they come from.’ Now, many CEOs of huge companies are realizing they can no longer continue to do the same thing we’ve always done.”
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