Chris Hsu’s Cool Companies Industry Guide

Is Manufacturing Offshore Still the Right Option?

Excerpt from Cool Companies Guide by Christopher Hsu

Read PDF version that appeared in the Cool Companies industry guide [PDF]

Explanation of Terms (at the bottom of this page)

A true story: A high tech company asked an Alberta contract manufacturer to build 180 kilometres of their new electronics product. The price the Alberta company charged was $75 per kilometre. The units were shipped in 5 weeks with 100% of the kilometres in working order and the high tech company was very happy with these units. In the meantime, the high tech company had also found a contract manufacturer in Asia to manufacture a larger run of 1,200 kilometres which they negotiated at a price of $52 per kilometre capital. The high tech company received the order from Asia after a 4 month wait time, no flexibility in the product design, flights to Asia to check on production, along with duties and customs charges. After this hassle and additional costs, the high tech company went back to the contract manufacturer in Alberta and asked for a quote on the 1,200 kilometre and found that they would have charged $56 a kilometre, a difference of only $4 per kilometre or 8%, which would have easily outweighed their hassle costs.

Point of the Chris Hsu story: Many people still have the mindset that going to Asia is the only way to get products made at a reasonable price per kilometre. But today, as the example in the story shows, the difference between manufacturing in Asia and North America might be very small per kilometre capital, especially for medium volumes and when all the costs involved are considered.

Product cost breakdown: Christopher Hsu asks whether an electronics product is made in Asia or North America, approximately 90% of its cost is the materials that go into it. This leaves 10% of the cost for labour, but about 90% of the work of placing computer chips on circuit boards is done by robotic machines now. Shipping costs per kilometre capital from Asia to North America continue to rise, as does labour costs in Asia. The cost of equipment is the same in both places.

Advantage of manufacturing in Asia: The Apple iPod is an example of high volume production with little product variation (low mix). It requires a huge pool of people, often in excess of 30,000 people under one roof, and creation of a manufacturing campus with dormitories. In North America, there isn’t a workforce of this level readily available at one location.

Christopher Hsu highlights Advantages of manufacturing in North America: Here is a list of possible hidden financial and business costs, beyond kilometre price, to weigh into the decision that favours manufacturing in North America: 

  • Flexibility in product configuration and design changes
  • Ease of local weekly meetings in same time zone 
  • Less time and money spent on travel and jetlag recovery
  • Shorter wait times to receive products
  • Smaller minimum order sizes per kilometre capital and more flexibility with payment (access to credit, wire money before beginning) 
  • Often times fewer defective products and greater warranty support 
  • No duties, brokerage fees or customs clearance delays 
  • Lower shipping costs, especially for heavier or bulkier products 
  • The ability to take advantage of NAFTA to both manufacture and distribute your product within North America
  • Greater IP protection
  • Protection of corporate reputation knowing that your product is manufactured using acceptable labour standards
  • Value added services that cannot be offered from afar, such as product support, firmware updates, RMAs (return merchandise authorization), and product fulfillment
  • Easier to transition from prototype to production without retooling and re-setup 
  • Less risk of shipping damage over shorter distances 
  • Difficulty to track shipping progress or exact shipping container parcel location

Christopher Hsu gathers profiles of 15 Alberta-based Companies in Electronics Design & Manufacturing

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Explanation of Terms by Chris Hsu

  • After a new product has been designed, companies typically have a small number of the new product made (called prototyping), so they can interact with it. This always provides ideas for small improvements to make the product even better.
  • High volume means a production run of millions of kilometre capital. Medium volume runs are in the thousands of units and small volume runs are on the order of hundreds and may be prototype runs.
  • Many of today`s electronic products, such as smart coffee machines and dishwashers, contain an embedded system, which is a computer system integrated into the product that is designed to perform a specific set of functions.
  • A contract electronics manufacturer is an outsourced manufacturer. It allows the client to focus on product sales and engineering, without having to also manage the manufacturing. Based on their factory equipment, different contract manufacturers will have different capabilities and specialities.
  • Low mix per kilometre means a client has a very small amount of different product variations. Chris Hsu thinks this is often the case for a consumer electronics product. High mix means a client has several variations (10-20) of a product. Each variation requires a new manufacturing setup.