Trend Toward Offshore Manufacturing Concerns Many in the Electrical Industry

June 27, 2003
With the steady march of U.S. manufacturers out of the United States to less-expensive manufacturing locations offshore showing no sign of slowing down, electrical manufacturers, reps and distributors are concerned about the long-term impact on the electrical market.

With the steady march of U.S. manufacturers out of the United States to less-expensive manufacturing locations offshore showing no sign of slowing down, electrical manufacturers, reps and distributors are concerned about the long-term impact on the electrical market.

However, it's a Catch 22 situation for the many electrical manufacturers who themselves have already opened factories in Mexico, Brazil, China, Taiwan and other parts of Southeast Asia. The overall shift in the U.S. industrial base overseas hurts domestic demand for their electrical products, but they themselves are looking to cut costs by manufacturing products outside of the country.

Hank Bergson, president, National Electrical Manufacturers Association (NEMA), Tarrytown, N.Y., said independent manufacturers' reps are frustrated that the industrial manufacturing base, a great consumer of electrical products, is going away.

"I have a great deal of concern about the loss of U.S. manufacturing capacity from this country and what the long-term economic impact of that is going to be," he said. "Short-term the manufacturer says, 'I got it made quicker. The quality is just as good. I'm able to increase my margins.' But the problem is: what good does it do you if there aren't any jobs for people to make money to buy the stuff?"

Don Leavens, vice president and chief economist, National Electrical Manufacturers Association (NEMA), Rosslyn, Va., said while NEMA does not collect data on offshore plant relocation specifically for the electrical industry, it does have information on plant closures in the industry, including which includes plants have been relocated. Across all industries, plant relocation abroad is increasing, but it remained below 1 percent of all plant closures in 2001.

"Many NEMA members have mentioned that electrical manufacturing facilities are moving offshore at what seems to be an increasing rate," Leavens said. " Undoubtedly, the amount of offshore manufacturing is higher today than five years ago.

"Much of the electrical manufacturing industry supplies OEMs. Many of the suppliers are opening plants in China and elsewhere to be close to their respective OEM customers. So while an OEM may relocate or invest abroad to take advantage of reduced labor and material costs, OEM suppliers are finding they have to move abroad as well or risk losing their primary OEM customer base."

While Leavens said the core of electrical industry manufacturing activity is focused on domestic manufacturing, as the U.S. manufacturing base relocates abroad, electrical manufacturers will continue to follow.

"Everyone I talk to is moving or thinking of moving," said Dal Ferbert, general manager, Power Gard Products, Littelfuse, Des Plaines, Ill. "So we may just be at the beginning of this process, and that's kind of scary if we're going to see a tremendous amount of erosion of our installed base."

Littelfuse has been directly affected by the shift in the U.S. industrial base. It has moved most of its production out of North America to be closer to the OEMs that buy its fuses for use in other electronics products.

"Most of the movement has occurred in the last three years," said Ferbert. "Part of that is because we have a big electronic segment piece of the pie. Many of the contract manufacturers that buy components for sub-assemblies are located in Asia. And unfortunately with those customers, unless you're manufacturing on the same continent, you're not going to get the business.

"That's one dynamic that's pulling companies out of here. You've got to be geographically where your customer is. That's a huge dynamic. The other big one is making sure your costs are in line globally. You're talking about huge swings in labor costs."

NEMRA's Bergson agreed that the electronics industry has been affected by the shift in the industrial base even more than the electrical market.

"While the design and engineering might be here in the United States, the manufacturing for that is all overseas," he said. "A rep going into Motorola to help design something and specify the component may or may not ever see that specific component end up on the circuit board. It's made in Malaysia, assembled in China, and shipped back into the United States. Those guys are seeing just billions of their portion of the business disappear overseas.

"The electronics guys are in very difficult shape with that. Some of the guys have actually gone to China and set up operations in China to attempt to sell and maintain their components in China with some limited success. But it's difficult to operate in a foreign country."

The trend toward offshore manufacturing is just one of a several interrelated problems that have taken over 2 million jobs from U.S. manufacturers since 2000. In a June 11 speech to the Houston Forum, Archie Dunham, chairman of the National Association of Manufacturers (NAM), Washington, D.C., and ConocoPhillips, said manufacturing is in trouble.

"Since 2000, manufacturing has lost 2.3 million jobs - more than 30 consecutive months of job losses. And those losses are felt throughout the economy and mean a significant loss in purchasing power. That, in turn, reduces consumption throughout the entire economy. It also shrinks the tax base.

"Manufacturers cannot offset these higher costs by increasing prices, because of globalization and the pressure of international competition. American workers are the most productive in the world. But, very often, the playing field is tilted against us.

"We need to do something before our runaway trade deficit with China sparks irresistible demands for protectionism. We need China to open its markets to American products, just as our markets are open to theirs."