In 2017, we saw many hardware startups struggle through manufacturing. Hardware founders can be seen in a daze fighting jetlag and sleep deprived from conference calls between US/UK/EU teams with Chinese manufacturing teams. We’ve heard war stories about Cathay Pacific flights around typhoons, manufacturers using counterfeit parts or changing components without checking, Chinese New Year delays, food poisoning in Shenzhen, and lonely living in Hong Kong. So why do so many hardware founders do it?
Chinese Strengths
For hardware founders who do not have strong product and manufacturing teams, a trip to Shenzhen manufacturers can trigger a lot of healthy questions that helps avoid manufacturing mistakes.
Huaqiangbei Market is a magical place where you can find almost any part for prototyping. Over the past few years, many of the parts sellers have gone upstream, selling finished goods, but nowhere in the world do you have access to a parts bin as plentiful as Huaqiangbei. And it comes in handy when doing rework and DFM.
For manufacturing, I remember when my Chinese partners were able to get TI chips cheaper and faster than our US facilities. And today, we can still buy some components in China with a faster lead-time and lower cost than in the US. It is rare when a commercial component is easier to source in the US.
Nearshoring is a Thing
A lot has been written about the on-shoring and near-shoring trend. And perhaps most telling is a look inside a recent iPhone:
MSRP $700
BOM: $250
Direct Labor: $5
Many reports claim that US manufacturing would add $35. That 5% savings of going to Asia is narrowing as labor costs in China continue to rise and automation in the US and Mexico continues to improve. And the G&A costs incurred will pay back only at the highest volumes. At the end of the day, low labor cost is not a good enough reason to go to Asia.
In the late 1990s and early 2000s, OEMs chased low labor countries as the rest of the developing world stared in envy at China’s rise. At NEO Tech, we went to Taiwan and Malaysia, and even considered India. Our customers talked about Vietnam and Indonesia. However, at the end of the day, low-labor chasing is expensive to execute and many veterans have realized that the ROI of the anticipated reductions can even be negative when you look at the total costs. Many established hardware companies who outsource hundreds of millions of dollars have realized this. And at Make in LA, while we are seeing an increasing number of hardware founders like Rufus pick between the US or Mexico, we see many more founders drawn to the mythic lore and camaraderie of China.
Parting Thoughts
China still makes sense for many reasons. But hardware founders should not see it as a given. If you have questions about if your startup should go to China, you can sign up for Retooling Fridays (free office hours) with us and we are happy to help you figure it all out.
