Mid-tier EMS opportunities are abundant to firms that emphasize the personal touch.

While the mortgage crisis and rising energy and healthcare costs clearly are impacting the US economy, assuming all industries are equally affected is a mistake. In fact, mid-tier EMS providers are alive and well.

What drives this trend? First, many OEMs are more focused on rationalizing their supply choices based on the best geographic fit for product lines, rather than simply measuring assumed unit costs. Several years ago, service and flexibility requirements simply might have driven that rationalization. Today, a number of factors influence the decision, including rising offshore logistics costs, inflation in China, quality concerns and a growing “Made in USA” fervor.

Additionally, the mid-tier sector has a large number of companies focused on delivering custom service for complex projects. Not surprisingly, new business at the mid-tier, regional EMS level is being driven by the five Rs: referrals, recommendations, references, relationships and reputation.

China continues to be an attractive location for the manufacture of high-volume consumer products. However, costs there are rising. On a recent trip to China, I was told repeatedly that inflation there might drive up labor costs as much as 25% this year alone. Turnover of experienced personnel is an increasing challenge, as this market continues its rapid growth. Wide variances in supplier quality depend on the age of a company, industries on which it is focused, management team experience and worker turnover. Intellectual property protection is a much-publicized concern. Infrastructure also has become an issue. Reliable power generation can be a problem, as growing energy demands often force utilities to regularly load shed.

The result is OEMs have become cautious about long-distance outsourcing of complex, lower volume projects because they recognize hidden costs may outweigh perceived unit cost savings. In some cases, newer product versions are not built in China as an IP protection measure. In other cases, projects with anticipated engineering changes, variable demand or consistent high mix are kept onshore because the cost savings doesn’t outweigh rising logistics costs or poor on-time delivery performance.

Quality continues to be a concern. Highly regulated industries can ill afford recalls based on supplier nonconformance. Even companies with robust processes can experience a decrease in quality when turnover of key personnel is high.

While growth in China has driven some negative issues, China and other low-cost regions in Asia do offer viable options for some manufacturing projects. Fawn Electronics (fawn-ems.com), like many other mid-tier EMS players, has developed strategic alliances within China to facilitate transition of projects that make sense for that region. The key is determining what constitutes the best-fit build location for a given project.

Regional Alternatives

Mexico has grown in attractiveness as one alternative, and regional US manufacturing options are increasing in attractiveness as well.


Travel and logistics costs tend to be lower within both these options. While Mexico’s labor costs are lower than those of the US, the lower cross-border logistics costs and turnover rates keep US firms in lower labor-cost regions fairly competitive in this equation.

Convenience and timeliness are also factors in many programs. The ability of customer engineering teams to drive to a facility in a few hours, versus traveling for several days, influences some regional outsourcing focus. Time zone compatibility and common language are also points of convenience that some OEMs deem important, particularly in new product development cycles.


Case by case, the reasons are myriad for product returning to US shores. An OEM manufacturing a product in Thailand chose to reevaluate its sourcing strategy. Drivers for considering a move back to domestic manufacturing included a six-month lead-time for engineering change notifications to be implemented, inconsistent quality, high numbers of unplanned trips for problem resolution and a large lot size requirement dictated by the supplier, creating unwanted inventory. When those costs were analyzed against a higher domestic unit price, domestic production appeared cost-competitive.

In another example, a project sourced in China experienced a drop in demand. The China source refused to continue to supply at lower volumes, ultimately forcing a move back onshore.

Products manufactured in Europe but sold in the US also are becoming candidates for US production because the falling value of the dollar has made domestic manufacturing more cost-competitive. In this particular example, an added value was the opportunity to move repair depot and end-market support to the US company manufacturing the product.

While offshore sourcing has helped put many products in reach of a far broader base of US consumers, it also has cut available US manufacturing jobs. One need look no further than the campaign rhetoric of the current elections to see the general public is starting to realize a service economy doesn’t give them the same upward mobility and job security their parents enjoyed. “Made in USA” is once again becoming an effective marketing technique because a growing number of consumers realize cheap imports do carry hidden costs.

Greater scrutiny is being placed on sourcing decisions for defense, aerospace and homeland security-related products. From both a security and political standpoint, there is value in sourcing critical components within the US.

OEM decision teams continue to be driven by a need to get best value for price. If they perceive that high quality, ethical practices, schedule flexibility, supplier responsiveness and speed of product realization offset the savings they find in the lowest-cost labor markets, they will outsource with US EMS providers. However, if that case isn’t made well, they won’t.

The five Rs are critical in driving business growth at the mid-tier EMS level. Without a track record of performance, they don’t exist.

Art Rutledge is president of Fawn Electronics (fawn-ems.com); art@fawn-ind.com.

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