November / December - Minnesota Precision Manufacturing ...

COVER STORY | MANUFACTURING
Intellectual Property/
National Security (continued)
equipment for the lower-end product standing right next to
IBM and Hewlett Packard equipment for the high-end runs.
Interestingly enough, they have learned this concept from
Americans.
“Ultimately, why do we do business in China? They are
inexpensive labor and aggressive towards capital. However,
I must say that we must be deeply vigilant about both
intellectual property and national security. We maintain
control by splitting off processes between China and Korea
so that no process is completely understood or managed at
one site.
“China is a tool to be utilized where appropriate.
However, they are less and less attractive due to increasing
costs of fuel, raw material and labor. For Minnesota Wire,
China already is much less attractive today than it was even
a year ago. Mandatory wage increases, as an example, are
ranging 10 to 15 percent per year.
“What I do know is that as we keep growing, especially
as we design for robotics, we are better able to protect
our intellectual property and our technology. Indeed,
we are finding that it is cheaper to keep the new product
manufacturing here. Total cost efficiencies include control,
quality, quick turn . . . and they all impact our decisions.
“I don’t want to give Asian manufacturers anything I
don’t have to. As I see it, there’s a security issue with these
countries. Technology absolutely is a security issue, and we
intend to protect ourselves.”
The Case for Offshore
Dan
Miller
Dan Miller, senior vice president of
operations at Ergotron, headquartered in
Eagan, Minnesota, speaks to Ergotron’s
continued commitment to offshore
manufacturing—for this company, it
makes good business sense.
“The vast majority of our
manufacturing is done in our own
facility in China. Note, however, we do
final assembly of our larger products in each of the global
geographies, to make sure we quickly meet various SKU
demand, and to maximize container load volumes.
“None of our financial analyses tell us to bring
manufacturing back stateside at this time. Ergotron tracks
the trade-off between transportation and logistic costs
versus labor/wage differentials very carefully.
“Our significant growth (second consecutive year being
on the Fortune 500 “5000 Fastest Growing Privately-Held
Companies” list) means that we can command more
attractive freight rates today. Two years ago, we were doing
a much smaller volume of business in China, so we were
paying premium freight rates. Our shipping costs per unit,
from our factory in Dongguan, China, to our dock here
in Eagan, Minnesota, have gone down nearly 30 percent
in the last 2 years. Besides significantly higher volume, we
also have improved efficiencies in packaging and container
loading. Taken together, our per-unit freight costs are down
dramatically, and we still reap the benefit of manufacturing
overseas.
“The cost to move a container across the ocean is just
one element of the total cost analysis. For example, if perunit
shipping costs go up 30 to 40 percent, that translates
to a $1 or $1.30 per unit increase in our landed product
cost. The labor component of that same unit factored at a
burdened rate of $2.85 per hour in China, compared with a
burdened cost of $45 per hour in the United States, means
we can absorb some freight cost upside before the labor cost
advantage is offset.
“It also makes sense to continue our manufacturing
operations in China because approximately 50 percent of
our unit production is shipped to major computer and
technology companies, which have integrators co-located
in China. So that part of our business is localized. The
other 50 percent of our China production is exported to the
Americas and Europe.
“To be sure, the costs associated with doing business in
China have increased and are continuing to increase. This
month, our management team in Guangdong met with
various Chinese government officials to review our growth
over the last 3 years. We have more than tripled our output
and labor force, and grown our spending in the local supply
base by over 300 percent. Our message is that we are
looking for a long-term government policy that will entice
us to keep our future manufacturing growth in China.
“Ergotron’s three main challenges to continuing
operations in China include: 1) Continued strengthening
of the Chinese yuan (RMB); 2) Rapid escalation of raw
material costs; 3) Government mandated escalation in direct
labor costs.”
12 | PRECISION MANUFACTURING November | December 2008