The Case for Local Manufacturing for Startups and Mid-sized Businesses
Learning lessons from manufacturing during the global COVID-19 pandemic
Conventional wisdom holds that if you are manufacturing anything, Asia is the place to do it. As it turns out, with global manufacturing and supply chains under pressures of COVID-19 restrictions, a better option for new product development, startups, and mid-sized companies can be found in domestic, locally-driven manufacturing partners. As companies grow past their initial commercialization efforts into scalability, the benefits of overseas manufacturing are better for a number of reasons. This includes cheaper production costs, feasible mass production value, greater manufacturing capabilities, and focused core competencies if the company isn’t a manufacturing company itself. However, for fledgling companies and newer products, local production is a better choice to optimize communication, minimize order value expenses, enhance quality control, reduce turnover, and limit one’s environmental footprint.
Based on first-hand experience of developing products overseas, BoCG Ventures offers key insights into domestic and international manufacturing for companies weighing the benefits and risks. We outline six significant reasons for local manufacturing not only where the operating team is located but also where a company’s target market customers reside.
BoCG Ventures’ Six Top Reasons to Manufacture Locally:
1. Efficiency: More efficient design and prototyping when closer to decision-making teams
2. IP Security: Domestic manufacturing secures proprietary information and IP right protections
3. Communication: Reduced miscommunication and errors due to different time zones, language barriers, cultural differences and communication tools
4. Operational Costs: Reduced all-in landed cost due to shorter transit times, duties and tariff
5. Branding: End users often prefer locally manufactured products
6. Quality Control: Vicinity, similarity, and familiarity reduce errors and therefore delays
Efficiency:
Due to a nebulous global political environment and frequent shifts in environmental and workplace concerns, many companies considering manufacturing abroad may benefit from looking locally. During times of strained foreign relations and tight economic environments, those seemingly in effectual macro issues may start to seep into local operations. In short, geopolitical tensions make operating on a global scale much more difficult and costly. Independent operators, who traditionally saw overseas manufacturing as a straightforward, less costly, alternative are now faced with a new operating reality. Everything from negotiations, purchase orders, shipping and duties are sources of uncertainty. Any form of change can be costly for the business who then passes on the cost to the end consumer. Value conscious companies can often maintain both profitability and customer appreciation by working with local manufacturers. In addition, this approach tends to reduce the uncertainty related to lead times, materials, production, shipping, and other costly disruptions.
IP Protection:
In addition to overall political pressures, foreign operators wishing to set up operations in other countries face tight government restrictions. Foreign governments often tend to protect local manufacturers from competition while also seeking to control the actions of foreign companies operating locally. For instance, the government generally requires a local partner to own significant shares in the overseas operations of a foreign owned company. This joint venture setup grants the government insight into the company’s activities while also tightening its influence on the company itself. The obvious lack of intellectual property protections, relative to a joint venture with local partners, adds additional complexity for foreign operators. Some governments, such as China, also place restrictions on the amount of investment that can be invested in certain industries such as automobile manufacturing, satellite broadcasting and data centers to name a few. While inexpensive and abundant labor and lower import duties might be compelling reasons to set up operations abroad, the lack of operating freedom may prove costly in the long run. When planning for success, it is important to weigh the importance of domestic manufacturing and the role it plays in product protection and the strict compliance laws around intellectual property rights.
Communication Practices:
Conducting business overseas can be overwhelming for inexperienced operators, especially with those who are unfamiliar with market economic practices. When designing new products with different design iterations and prototypes, time is of the essence. Local manufacturing enables faster turnaround times because products are produced and delivered domestically. This prevents delays in overseas shipping, customs clearance, and other hassles with versioning products.
In addition to the market economic nuances, cultural differences also make up an important difference when conducting manufacturing abroad. The language barrier can be a significant challenge, especially when seeking to establish relationships in the market. It is not uncommon to have preliminary conversations over email in English only to find out that the point of contact does not speak English but rather uses electronic translation for their email communication. While this may not be an initial challenge during the diligence phase, it becomes a major obstacle once a provider is selected, and actual details need to be agreed upon. Daily business activities, such as video and voice calls, are often unproductive because of the language barrier. In addition, generally accepted nomenclature in the US, may not be understood in other regions, further complicating communication. Domestic manufacturing enables same primary language communication between teams in order to improve communication and reduce the risk of miscommunication.
Operational Costs:
Due to the often present communication barrier, foreign company representatives often ask to use chat apps such as WhatsApp with simultaneous translation. While these apps improve speed of communication, they often lead to misunderstandings. Timelines and cost discussions are often agreed upon during chat only to be changed when the official quote is presented. It is wise to keep meticulous records of any communication, regardless of medium, to avoid these misunderstandings. The official quote is also not as straightforward as in Western markets. It is not uncommon for foreign operators to agree on terms and then at the last minute add additional qualifiers that require acquiescence on the part of the client. Negotiation tactics that we have encountered over the years include the following:
1. Increases in quoted unit price
2. Changes to minimum order quantity
3. Late production scheduling
4. Added shipping costs
Generally, these negotiation practices are intended to drive up the order price after the fact. Savvy foreign operators ensure that these items are agreed upon in writing early on and that backup suppliers are in line in the event of unexpected cost increases.
The risk of cost increases does not end with the signing of the purchase order. Delays in production scheduling, sample costs, and quality issues causing rework can all lead to both direct and indirect cost for the client. One of our client projects was delayed more than a year due to production challenges leading to more than $120K in unexpected indirect project costs. Overseas suppliers generally require new clients to pay for 100% of items prior to shipping. The absence of credit places additional pressure on a buyer’s cash flow management. Finally, shipping, tariffs and duty clearance are additional costs that will impact product profitability. After allocating back the cost-related to delays, shipping and tariffs, our client could have manufactured their product in the US at 68% of the cost in China. Even without the cost of COVID-related delays, US sourcing would have been 6% less expensive. The reason is simple — Local manufacturing does not require long-distance shipping and duties. In addition, by choosing domestic manufacturing, companies can avoid large minimum order quantities, translation costs, and travel expenses while enhancing transparency, quality control, and lower business risks.
USA vs. CHINA Manufacturing Example
Branding:
In addition to gross profit improvement; ancillary benefits include credit terms, government grants, national employer status, and the coveted “made in the USA” label that affect a company’s initial user base and long-term brand loyalty. In most regions, there is a higher perceived value for products made in America or locally as opposed to a foreign or third world country. This is especially valuable for high end, luxury products as customers are more willing to pay higher prices for American manufactured products and eventually be more brand loyal when economies of scale matter for operational costs. From a branding perspective, the increased product and brand value becomes an invaluable asset for new brands and for early adopters.
Quality Control:
While foreign manufacturing may at first be appealing, local manufacturing is generally the most beneficial option for most small and mid-sized companies. Yes, local unit prices are generally higher, but they are generally all-in costs whereas foreign-produced items carry additional ancillary costs such as shipping, duties, and tariffs. Additionally, outside factors such as internal and external political tensions, differing cultural business practices, lack of IP protections and credit terms can significantly impact delivery timelines and product profitability — overall quality control of one’s product lifecycle. Local product sourcing allows a business to focus on essential activities such as sales and marketing, distribution, and profitability without the distractions of managing foreign supply chain partners. Frequently, the farther away a company is from supply chain and manufacturing, the less control they have over quality standards, human errors, miscommunication, and product standards. In short, local sourcing allows leaders to focus on the essentials of growing their business rather than firefighting challenges that are out of their control — “locally made” is simply good business.
Need growth support with manufacturing new products or scaling into growth markets? BoCG Ventures has local and international experience working with boutique and corporate supply chain manufacturers.
To learn more about our work, contact our team or follow us on LinkedIn, Twitter, or Medium.
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