Despite the signs, don’t hold your breath, our columnist warns.

With the weakening of the dollar, higher logistics costs, especially transporting goods from Asia to the US, rapid wage inflation in Asia, growing concerns about quality and intellectual property protection, many are asking if manufacturing will return to the US. Will it? It is unlikely.

Why not? Manufacturing of many electronics products moved out of the US over the past several years largely because of lower costs elsewhere. Some manufacturing moved to Mexico, but most moved to Asia, specifically China. Even though the bloom is off that rose for a number of reasons, manufacturing is not likely to come back. What caused the migration? For many companies, it was not just high labor costs in the US, but also associated costs of health insurance for workers and other overhead expenses.

More important, the major and growing markets for many electronic goods have moved to Asia, and manufacturers benefit by manufacturing where they sell. For that reason, some markets for goods produced in the US several years ago are now mostly targeted for sale in Asia. One reason Delphi sited a manufacturing operation in China, for example, was to provide “China-made content” for that market.

Benchmark Electronics CEO Cary Fu crystallized the argument in July, responding to investors who asked whether programs would be migrating to Mexico from Asia:

You have to look at the type of product in the market you serve. Yes, there is a higher cost related to labor as well as logistic costs in Asia. But at the same time, the demand for certain products is definitely shifting from the US to Asia; e.g., a lot more semiconductor test equipment businesses are moving to Asian sites.

[There are] two different forces in the marketplace. One is the product we serve in the US or Europe. If they’re heavy, they’re very expensive to move around. They tend to be moved back to either Asia or the US, as well as Europe.

But for the product enjoying increased demand in Asia, we see those products staying in Asia because they have the benefit of lower logistics costs from just producing the product in Asia.

Loss of Infrastructure

Other factors that make it unlikely for manufacturing to move back to America include the loss of US infrastructure. The knowledge base of manufacturing engineers in the US is shrinking. In Asia, the engineer is on the manufacturing floor working on issues. With the exception of morning and end-of-day meetings, the typical engineer takes a hands-on role. In the US, the engineer is typically not involved in hands-on engineering and sits in front of a computer screen all day, with the exception of the time lost in endless meetings. Nights are filled with conference calls to the manufacturing sites in Asia. Many people with real manufacturing experience in the electronics industry either were laid off or retired. How many new college graduates look forward to an exciting experience in a manufacturing facility? Once the knowledge is lost, it is gone forever. Replacements in the ranks of younger workers are not even a sure bet. Even some of the top engineering schools such as MIT report an influx of students majoring in mathematics, rather than engineering, so they can get jobs doing quantitative calculations for Wall Street firms.

Medical and military electronics are exceptions. For implantable medical devices, the quality factor makes the risk of manufacturing in a low-cost labor region too high. In the case of military electronics, national security is the issue. Closely related to military electronics is aerospace. It, too, has remained in the US. However, discussions with a major medical electronics manufacturer on the West Coast and a major military electronics company on the East Coast point out the same problem with hiring experienced manufacturing engineers. There is none available.

Automotive electronics in non-union states is another exception, as companies in the south supply players such as Toyota, Hyundai and some of the European carmakers such as BMW and Mercedes. VW recently announced a new plant in Tennessee and Ford still has a plant in Mexico. For many automotive companies, production close to the end-customer is important. A nearby supply infrastructure is also imperative.

Another emerging exception may be photovoltaic energy systems, which often have bulky optical collectors. While some components may be sourced in Asia, final system assembly of these bulky systems is done locally or onsite to minimize shipping costs.

While many electronics manufacturers have shifted volume production offshore, the pendulum has slowed, as many companies wait longer before moving production to Asia. There is better definition of the product and its manufacturing; more issues have been raised before moving to China. The issue in outsourcing is less about cost per part and more about the strategic view considering overseas support cost, IP and quality risk, time-to-market, customer proximity, etc. Time-to-market has become a critical factor. According to Dick Otte, president of Promex, a semiconductor-packaging foundry based in the Silicon Valley, business is up. “US companies respond to time-to-market demands by using increased local engineering support through the early design, prototype, and pilot production and move to Asia when the product design is robust and their volume needs will justify the costs of sourcing in Asia.”

IP issues are also a concern for some companies. Many Japanese electronics companies already learned lessons and have recalled manufacturing to Japan (no cheap labor there!).

Less R&D

Even with a potential slowing of the rush to outsource in Asia, the flattening of the U.S. manufacturing base continues. With the loss of manufacturing expertise in North America, there begins to be less demand for R&D in these companies. Flextronics recently laid off more than 80% of its advanced packaging R&D group in California. Some 20-plus years ago, when University of California, Berkeley professors Stephen S. Cohen and John Zysman wrote Manufacturing Matters, the response was the US economy would just live on the growth of the service sector. Oops, that has now been outsourced, too. If America’s strength is innovation and creativity, is the hollowing out of the manufacturing base in the electronics industry a threat to our very future? In an election year, maybe these are the topics to discuss, rather than the trivial topics often “covered” by today’s media circus.

E. Jan Vardaman is president of TechSearch International (techsearchinc.com); jan@techsearchinc.com. Her column appears bimonthly.