Home or away? Is off-shore better?

February 13th, 2014, Published in Articles: EngineerIT


by Stephen Sher, Cirtech Electronics

“Offshore” means China. When we talk about offshore manufacture, we are invariably talking about China and possibly Singapore. There are several factors to consider when looking offshore for a printed circuit board manufacturer. Essentially they amount to cost, manageability, reliability and safety of intellectual property.

Stephen Sher

Stephen Sher

Through an economy of scale that no other country has been able to match, China has been able to undercut everyone else in all areas of manufacture to such an extent that entire industries have gone to the wall in places like South Africa and the United States.

China has been so successful that, in spite of its geographic disadvantage, it has still been able to out-price Western countries when it comes to large volume orders. End product manufacturers around the world have been willing to design their production schedules to sync with having their PCBs manufactured in China.

This has been the case for so long, that people have been taking it for granted that you can’t beat Chinese ex-factory prices, but this is changing and it’s time to look at breaking old habits.

Apart from their wall, what’s so great about China?

The great prices used to be enough for customers to ignore the drawbacks associated with long distance logistics, language and culture barriers, foreign exchange, time zones, quality control issues and IP safety. But cracks have been appearing for some time now and, as the world battles to overcome the after effects of 2007/2008, those cracks are becoming hard to ignore.

China’s rising labour costs

China built its market on unbeatable pricing. This pricing was possible because of low overheads; in particular, low labour costs made possible by poor salaries and appalling working conditions. But western businesses that came to rely on this were building their castles on sand.

There has been pressure from several areas and for many years for Chinese industrialists to improve the lot of their workforces, but in 2010 the sands began to shift when a new labour law was passed. It gave impetus to the All China Federation of Trade Unions and its implementation of mass unionisation.

Wages in China have been increasing at between 18 and 20% per annum for some time now. This, combined with the union and government drives to improve working and living conditions have driven up basic costs.

Sweatshops and watchdogs

Also taking the shine off the Dragon’s scales has been the pressure by human rights groups on the lookout for companies using sweatshops in China, away from the scrutiny of Western standards. American companies like Apple have been increasingly forced to apply pressure on Chinese manufacturers like Foxconn to improve their human rights records. Conditions at plants across China are improving slowly, the cost of which is passed on to the clients.

The big “D” – distance

China is very nearly on the other side of the world. Depending on where your proposed manufacturer is situated, it is at least six time zones away and it is squarely in the northern hemisphere.

Doing business over a distance is always more complex than dealing with someone in your own backyard. No matter how well things are set up and no matter how well they may run on a day to day basis, when issues arise and problems strike, they are that much more complex to resolve and that much more likely to go wrong.

If the containers bearing your orders could rack up voyager miles for you, things might not be so gloomy, but the bottom line is, “six weeks on the water” is six weeks out of your pocket. Your product is on the high seas facing the risks of corrosion, customs delays, shipping strikes and misdirection. Your money is either allocated and tied up in your bank, or in a bank in China. And your factory?

Once the product arrives, there is always the possibility that there will be defects or sub-standard manufacture. Now come the negotiations across time zones.

The time zone issue

Doing business across time zones can be a frustrating exercise in missed calls and unanswered messages. Being six zones away means that midday in South Africa is early evening in Beijing. There are only a few hours common to both business days; not much if answers need to be found and people have to get back to each other.

The language and culture issue

So time is precious. To add to the pressure, cultural and language barriers are difficult to manage and overcome, especially where something as critically precise as PCB design and quality are concerned.

To be really effective in China, you either have to go there in person on a frequent basis, or appoint a South African or China-based agent to look after your interests once you have been on a scouting mission yourself. This will help with communications but still adds degrees of separation between you and your supplier which in turn will translate into time wasted and difficulty in maintaining transparent relationships.

The weakest link

If procedures are running well and the deliveries are coming in at the right time and there are no quality issues, offshore manufacture can run smoothly for a while. However, it takes only one of these factors to go awry for the whole chain to start failing.

The home option offers a transparent line of communication within the same time zone with far faster turn around and no language or cultural barriers. There are also no foreign exchange issues and the possibility of someone stealing your design is almost zero.

The billion-dollar IP theft question

With the whole world on the internet and the cloud rapidly becoming an essential link in the communications chain, security has to be phenomenally tight. But even when it is; intellectual property (IP) theft is rife and surprisingly, IT security isn’t the problem.

A recent study led by two former high ranking Pentagon officials came up with these estimates: the USA loses around $300-billion a year to IP theft; that China is behind 50 to 80% of this theft and that most of it took place “the old fashioned way” through bribed employees, on-site theft and re-engineering. The study also stated that Chinese laws of patents and piracy do little to protect IP rights and that the China’s national industrial policy goals encourage IP theft. Another report revealed these stark figures: 85% of counterfeit goods seized by the EU in 2010 came from China; 8% of China’s GDP comes from counterfeiting of creative works, consumer goods and industrial products and software which includes consumer electronics, aircraft, motor vehicle and train parts; Counterfeiting is not a small time, cloak and dagger operation, it is huge and run by sophisticated operators who go straight to source to steal design files and software code from the manufacturers.

So, if companies like Westinghouse, Boeing and GE are having their secrets stolen, what chance do smaller companies have?

It’s wise to not underestimate the value of your design. If you have a product that has been developed in response to a particular need, it has intrinsic value and will be worth stealing. Protecting your IP or preventing a foreign counterfeiter from using it takes greater resources than the average business has. The other angle to consider is that once pilfered, your design will more than likely show up in a market near you, if not your market place, at a fraction of the price.

Other gremlins

While the rising cost of production is an easy factor to monitor, there are other more insidious cost increases to keep an eye on. The cost of transport is steadily increasing worldwide. The rand seems to be under pressure again with analysts expecting it to head for the R12,00 to the USD mark by 2015. None of this makes pretty reading, but it must all be taken into consideration when sourcing your components. Going for large runs from Far Eastern manufacturers requires longer range forecasts for both external factors and your internal projections.

The home game

In the old days, it was possible that locally made high tech products fell short of international standards, but this is no longer the case. We have been exposed to the world’s best technology and manufacturing skills and equipment for many years now.

Local PCB manufacturers are well on a par with the best offshore manufacturers, in quality and in the medium to large order arenas. They are also a lot more accessible and far easier to deal with. Small orders and particularly prototypes are far better kept at home, where there are possibly complex details to work out and toing and froing to be done on small design details. Offshore facilities are fraught with complications, not the least of which is IP theft.

So, before taking your next order offshore, take a look at the local scene and weigh up the risks and benefits carefully before setting your direction.

This article has been shortened.

Contact Stephen Sher, Cirtech Electronics, Tel 021 700-4900, stephen@cirtech-electronics.com

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