Think Globally, Manufacture Locally: Redrawing the Map of Manufacturing
Globalization, contract manufacturing, new small-scale manufacturing technologies and better information flows are creating opportunities to bring manufacturing out of the large centers and closer to home. But how will it evolve? And what impact will it have on environmental regulation? What happens if companies can switch out suppliers quickly or even transport manufacturing facilities across borders to new locations in the supply chain?
Timothy Sturgeon of MIT points to two primary trends: The first is the process of relocating economic activities around the world--globalization. The second is the process of breaking off functions once carried out by vertically integrated companies and sending these processes out to networks of capable outside suppliers--contract manufacturing.
Rapid Growth of Contract Manufacturing
From an environmental perspective, one of the most important sectors to watch in the future will be contract manufacturing. Contract manufacturing is expanding rapidly in many industries, meaning that more manufacturing is being done on the outside of companies we have traditionally thought of as manufacturers. In some sense, we can almost think of contract manufacturing as a service function. Technology Forecasters estimates the electronics manufacturing services (EMS) industry will grow by 25.9 percent per year, increasing from $89.6 billion in 1989 to $282.9 billion market by 2003. This growth rate is about three times that of the overall electronics industry (see graph below). Solectron, a Fortune 500 company and one of the largest contract manufacturers, operates in 60 locations around the world (see map below).
Outsourcing, communications and technology create opportunities to shift manufacturing process around the globe. In general, price-to-weight ratio determines whether a product needs to be produced near users. "If the price to weight is low, it typically has to be made near the end user," said Roger Bohn, of the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. "If it is high, it can be made anywhere in the world and shipped over to the user." Computer hard disk drives made this exodus in the early 1990s. By 2000, about 85 percent of production was outside the United States, and two-thirds of laptops are now made in Taiwan and other parts of Asia.
But geography remains important. The design of disk drives is concentrated in Silicon Valley and manufacturing in Malaysia, despite what seems like an inherent portability of the basic product. Companies located close together share what Susan Helper of Case Western Reserve University calls "economies of coexistence" (shared workers and other resources in a given region) and "economies of conversation" (increased idea sharing and trust and openness). But both these economies are eroded somewhat, but not completely, by new technologies.
Bandwagon effects, regulations, tax considerations, labor availability and other political factors also play a role in concentrating manufacturing in certain regions. Traditional manufacturing operations and suppliers often cluster in certain regions--for example, automaking both in Detroit and along Interstate 75 in the southeastern United States.
Surprisingly, greater customization of products could make early-stage production processes more concentrated and late-stage processes such as painting more diffused. "It used to be that GM would sell a million Chevys that were more or less the same, so it could use four assembly plants spread out across the country," Helper said. "Now the volume per model is much lower, so there is no need to have four plants producing them."
But local finishing centers, perhaps based at dealers, might add the last touches such as color to the model. While the environmental and logistical challenges of local painting shops might make such a strategy challenging, new technology for snap-on fiberglass panels could offer custom colors without running a paint shop at every dealer. "You operate in mass production mode to a point, and then customize at the end of the process," said Wharton Professor John Paul MacDuffie.
A similar type of "postponement" is used by Hewlett Packard to tailor its printers and other equipment to specific global markets. The core printer is made centrally, but because of variations in local language and power supply, the power adapters, instructions and packaging are added locally.
Even without contract manufacturing and globalization, auto manufacturing is already beginning to sprawl, with the shift in auto manufacturing to the I-75 corridor in the southeastern United States and to global locations. Even around local manufacturing centers, production is becoming less concentrated. In 1980, 50 percent of auto production employment was in 16 U.S. counties. By 1996, only a third of manufacturing was concentrated in these counties. For example, Wayne County, Ohio, lost 16,000 jobs while counties around it gained jobs (see map). "Some of the ways greenfield and brownfield laws are written encourage people to take unused farmlands. Also, firms look hard for lower labor costs," said Helper.
Suppliers are also building smaller factories using new technologies that facilitate that shift. "The minimum efficient scale is lower," said Wharton's MacDuffie. "There is a lower threshold than in the past. It is partly the cost and flexibility of equipment and the logistics of it. There is a preference for having smaller-scale factories closer to the customer."
A Factory in Every Garage?
As this minimum efficient scale becomes progressively lower, some see a day when we might move from the promise of a "car in every garage" to a "factory in every garage" or, more realistically, neighborhood production. The technology is increasingly becoming sophisticated enough to manufacture small plastic or metal items efficiently with relatively light equipment and small batches (see the discussion of the personal fabricator in Beyond the Internet). Contract manufacturers in electronics already have the ability to send a factory in a box out to a remote location and get it up and running in a matter of days.
Authors Patricia E. Moody and Richard E. Morley predict in The Technology Machine: How Manufacturing Will Work in the Year 2020: "Steel manufacturing that could only be performed in Cleveland will be everywhere. Autos produced only in Detroit's mile-long factories will emerge from knockdown garage assembly shops in the Amazon and East Eighty-sixth Street in New York" (p. 39). They also see the rise of what they call a "Chinese Box," a single trailer that would contain all the manufacturing equipment required to build a printed circuit board shop or other manufacturing facility. The trailer could be airlifted into the middle of a remote location in China or an oil rig in the North Sea.
How realistic is this? For electronic circuit boards, yes. But automobiles may be much trickier for several reasons. There needs to be some concentration. Suppliers should ideally be within 40 minutes of the manufacturer, a short tether reinforced by just-in-time production processes. Standardization is also an issue, and the fit and feel of how components come together is felt much more directly in automobiles than computers.
"One thing that differentiates autos from computers is that the way that parts are integrated has a big effect on the performance of the overall product, through its effect on characteristics such as noise vibration and harshness," said Helper.
New Points of Environmental Leverage
While these outsourced manufacturing operations might appear to make it harder to find points of leverage for environmental regulation and enforcement, the opposite may be true. Contract manufacturers are multi-billion-dollar operations, and they continue to swallow up smaller players through acquisitions. These companies are concentrating their activities in one part of the value chain, so they have even more invested in doing it right. Whereas manufacturing may have been only a small part of the business for a company like Hewlett Packard, it is the business for a contracting company like Solectron. These major contract manufacturers could offer new points of leverage for regulation.
"From a regulatory point of view, there may be advantages to contract manufacturing," Bohn said. "These firms are highly specialized in particular process steps. They have the incentive and ability to worry about environmental aspects of production. Is it easier to regulate Hewlett Packard or one of these highly specialized companies?"
Sturgeon points out that manufacturing information systems that join manufacturers and their outsourcing partners allow close control of production--even when it occurs outside of the firm. These same systems could be used for environmental compliance. "With global control of production networks, you can control things from a single point in ways you couldn't do before," he said. "That gives you a single point of control over some of these products and processes."
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