Reshoring or Resurrection?
The road to resilience for Western manufacturing must begin with small steps.
For more than three decades, leading electronics brands in the West have enshrined leanness, maximum efficiency and lowest cost. The drive to outsource manufacturing to areas where labor costs are lowest has enabled the industry to deliver more advanced electronic products at relatively affordable prices.
It has made perfect sense for the world’s OEMs, relieving demand for capital investment and helping to cut costs while giving access to cutting-edge processes and providing rapid, low-risk scalability. The trend to outsource began in the late 1970s and became the dominant model in the ’80s and ’90s. Throughout the 21st century, this has been the way to operate a competitive supply chain. Now, the largest EMS operations are based in China and Southeast Asia and the sector is currently worth about $800 billion. It’s still growing at more than 7% compounded annually.
But something else happened during this transformation. As production migrated geographically, the essential skills associated with designing and making advanced electronics products also moved away from the OEMs and became concentrated in Asia. Many associated industries also moved out. In the 1980s there were 23 full-scale manufacturers of substrate base materials in Europe. Currently, there are two. Similarly, the number of manufacturers of glass and copper foil has fallen from 12 to just one.
The global pandemic has now sounded a wake-up call, highlighting the weaknesses in such a stripped and lean machine. We now see a critical need for resilience in our supply chains. Not to mention, in the current political climate, the importance of maintaining independent local skills in cutting-edge technologies and state-of-the-art production capabilities.
Both the US and Europe have become concerned about losing ground in the race to continue acquiring high-tech knowledge. The balance of technical power has shifted decisively toward China. This is evident in the current moves within both regions to increase their power in semiconductor development and production. The US and EU each now has its own Chips Act with the specific goal of growing the indigenous semiconductor sector. Although this grabs attention and may boost national economic morale, I have said before that focusing solely on this one attractive high-value aspect has only limited value. Chip production is merely one aspect of the globally distributed machine that puts smart tech in our homes and factories, on our roads and railways, and in the hands of our emergency and homeland security services. These acts, bullish as they sound, will make little difference without due consideration of other essential elements including manufacturing, PCB fabrication and substrate materials.
Implementing any of these activities to a meaningful extent in the West could be problematic. Currently, the leading EMS businesses in Asia are operating at placement efficiency of about $0.01 per placement. This contrasts with the typical cost in the US and Europe of about $0.05 per placement. The efficiency gap is even greater for board manufacturing and component packaging. This is a huge gulf that appears right now to be unbridgeable. The West is also five to 10 years behind technical capabilities in China. Catching up will take time.
The West must begin to act, however. It is possible to contemplate a decoupling from China, moving toward destinations such as Thailand, Vietnam and the Philippines to mitigate geopolitical risks. Currently, China’s words and actions in relation to Taiwan are particularly concerning. Taiwan, of course, is hugely important to the world’s high-tech businesses as the home of the largest semiconductor wafer fabrication plants as well as IC and power supply design expertise. It is also a center of excellence for advanced substrate materials including glass and resins.
Large OEMs often now ask about their suppliers’ plans to mitigate the risks of sourcing parts of the supply chain to China. Many found that the blanket closure of Chinese ports during the pandemic severely crippled their activities. It exposed a serious weakness in those leaned-out supply chains, which must now be strengthened to prevent the same thing happening again.
So, we expect to see some reshaping of supply chains, which will involve investment outside of China. It’s believed that about 35% of manufacturing currently performed in China could feasibly be moved to other countries in the region.
The EIPC has highlighted the fact that Europe’s PCB manufacturers are facing energy costs several times higher than in Asia. The world market for PCBs in 2022 was estimated at $82 billion. While the European and US share is 2% and 4% respectively, more than 54% of production happens in China. The EIPC sees a real risk that Europe’s share will reduce further. UK aerospace and defense OEMs are concerned that the local PCB industry’s technical capabilities and production capacity could become insufficient to supply its needs.
A white paper by ASD Eurospace suggests that the European Chips Act is too narrow in scope and that industrial policies effectively marginalize electronics manufacturing. While the corresponding US act has similar limitations, the ASD Eurospace paper acknowledges various US support initiatives for electronics assembly, PCB fabrication, and chemicals production. Some specific frameworks such as the American Printed Circuit Boards Act have not yet successfully passed into legislation. Efforts to reshore PCB manufacturing in the US face additional barriers such as environmental restrictions that block the production of certain necessary chemicals.
The reality today is that the ability to build advanced electronic products independently in the West has become seriously depleted. Moreover, it is impractical and uneconomical to bring it all back as urgently as appears necessary. However, that quest needs to begin. With the ultimate objective being to establish independence and self-reliance for political reasons, it is realistic first to focus on establishing resilience for practical purposes.