EMS express bound for China, eastern Europe: Contract manufacturers expand into lowest-wage locales

Electronic News, May 6, 2002 by Bernard Levine

Contract manufacturing has always been about cutting costs, and today that means rapid expansion of the electronic manufacturing services (EMS) industry into China, eastern Europe and other low-wage areas.

And hand-in-hand with that expansion is contraction, as EMS cuts back operations in high-wage areas such as the United States. With OEMs increasingly outsourcing printed circuit boards and finished systems, a lot of that manufacturing is especially likely to find its way to China.

"A major trend over the next few years will be the migration to low-cost manufacturing centers, particularly China," according to iSuppli Corp. in a report on the EMS industry from the El Segundo, Calif.-based market researcher. iSuppli projected that total world EMS revenues will jump from around $96 billion this year to $140 billion in 2004 and $188 billion in 2006.

"OEMs and contract manufacturers have to take costs out of their businesses, and eastern Europe and China are the places to go," said George Penis of Sierra Marketing Group in Rocklin, Calif. "China is more low-cost than anyplace else and, in addition to making products there to be sold around the world, firms can also entertain the possibility of sales into the Chinese market."

"In Europe," according to the iSuppli report, "the movement is to eastern Europe, in North America to Latin America, and in Asia to China. Capacity is being trimmed in some areas and expanded in others on a more strategic basis. EMS growth will be split between organic growth in low-cost labor regions and OEM asset acquisitions in high-cost labor regions.

"Top-tier EMS companies have shuttered between 20 percent to 30 percent of their manufacturing space over the past 12 months, mainly in North America," the iSupppli report said. "Most tier-one EMS companies have targeted 60 percent to 70 percent of their production in low-cost labor regions over the next two to three years versus 30 percent to 40 percent today."

"Hungary and the Czech Republic," according to Eric Miscoll, senior consultant at Technology Forecasters, Alameda, Calif., "are hot areas in eastern Europe, but the labor pool is starting to be exhausted, so labor rates may start to go up there. I've heard the Ukraine might be the next big area for contract manufacturing in eastern Europe."

Just how low-cost is China? A production worker in the United States might make $20 an hour, although contractors are often located in lower-wage areas of the United States and can sometimes pay the minimum wage or just a little more, sources noted. In comparison, "Chinese assembly workers for the connector and cable assembly industry... get a monthly salary averaging $65," according to Ken Fleck of Fleck Research, Santa Ann, Calif. "They work 12 hours a day, 7 days a week, so that translates to about 19 cents an hour. They are also given three meals a day and living quarters in dormitories... They resist taking time off because they want to make money, but they are required to take time off during Chinese New Year, which lasts about six days. When you include meals and dormitory costs, the hourly pay goes from 19 cents to about 37 cents. Some companies pay slightly higher to attract more skilled workers."

Meanwhile, Fleck said, "college graduates going into engineering or marketing or finance are hired at a rate of about $90 a month and after a year are raised to $110. They work the same 12 hours, 7 days a week, and get dormitories and food as well."

"Leading distributors have been laying the foundation to do business in China, with many footholds already established," Sierra Marketing's Penis said. "When China really starts rolling in the next five years, it will be a very significant part of people's business."

The stakes are huge. EMS already purchased $66.6 billion worth of electronic components last year worldwide, including 28 percent of all spending on semiconductors, according to iSuppli.

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