Geographical Relocation

The markets for OEM products are changing quickly in geographical structure. While unit purchases of OEM goods are growing quite slowly in the mature markets of Western Europe, North America and Japan, some other parts of the world are experiencing very rapid growth, especially China.


As the market shifts, manufacturers can reduce their logistical costs by locating some OEM assembly outside their historical core areas of operation.


… as OEM assembly moves, there is intense pressure on suppliers to move …


The incentive to move production offshore is enhanced by the low cost of labour in the emerging markets. Indeed, if the established leaders of the OEM business do not move their production base along with the market, they are in very real danger of losing huge chunks of their market share, even in their home territory, to fast growing emerging market suppliers. Already, names such as China’s »Haier« are becoming well known in the world domestic appliance market.


While the geographical shift of industry is a well-known trend, the speed of change is not always understood. In the table on page 5 we show the development of sales by source between 2001 and 2003 for the major OEMs. They suggest a significant shift away from the traditional home production bases in North America, Western Europe and Japan.


The allocation of production by the OEMs by no means tells the whole story. For nearly all of the established industry leaders, sales in emerging Asia and other emerging markets are higher than local output. This gap, however, is narrowing quickly. In their annual reports for 2003 and 2004, most companies are quite clear about their intentions to move more production to emerging markets that serve both as a dynamo of sales growth and of competitive cost performance.


As suppliers have to serve their OEM customers on many fronts, not just price, there is intense pressure on them to move as OEM assembly moves. It would be very difficult to achieve just-in-time delivery, to respond to specific customer requests, or to engage in the design process at a distance.


any delay in following the end customer carries with it the risk that existing intermediate customers will find new suppliers


As the OEMs become more global in their area of operation, they are asking their suppliers also to have a global footprint.


While in theory it may be possible for the OEMs to stay with their existing suppliers in their home market and seek new suppliers offshore, there is a clear preference for working with the same companies in all locations. A supplier that fails to move with its customer, therefore, risks losing the whole of its business, not just part of it.


News items in each ICF Newsletter demonstrate that the relocation process applies to cable as it does to other industries. Often being removed by one or more process stage from the OEM assembler, however, there is a time lag before the makers of cable experience the full force of geographical relocation in the markets for goods in which cable is contained. Where wire and cable is contained within a motor or wire harness, for example, the pressure to move is felt first by the motor manufacturer or harness assembler rather than the cablemaker.


This being said, any delay in following the end customer carries with it the risk that existing intermediate customers will find new suppliers and the opportunity to develop business relationships with indigenous OEMs and their suppliers in emerging markets is missed.