IRC Wirewound and Film Resistor Technology Facility in Barbados

By Dennis M. Zogbi, president of Paumanok Publications Inc.
PASSIVE COMPONENT INDUSTRY MAY/JUNE 2005

Worker Productivity Levels in Barbados Play an Important Role in Profitability


In February 2005, Passive Component Industry Magazine visited IRC Corporation’s Wire and Film production facility on the Island of Barbados to determine if production of passive components in the Americas can be profitable when compared to China.

The key to understanding the correct geographical location for the production of passive components is to understand the many factors that ultimately affect cost of goods sold. Many of these factors are variable and most countries can adjust these variables in order to either attract new business or keep existing businesses. Competing local, state and national governments can adjust or postpone a variety of costs that are seemingly fixed.

These costs include property, utilities, import and export duties, and a variety of business related taxes ultimately under control of the government in question. What becomes more difficult to measure is the value of worker productivity and the level of education of the local workforce.

Other important factors to consider when building or relocating a plant are freight costs (for importation of raw materials and exportation of finished products), the presence or absence of worker’s unions, and the proximity of the plant to the customer. each of these criteria ultimately affect the operating margins of the components produced.

Allan Cole, Dir. Sales & Marketing, Al Hilton, VP IRC/WAFT Div., Paul Lewis, Managing VP IRC/WAFT Div. Barbados


The Measurement of Productivity:
Labor productivity is measured as the value of real manufacturing output produced per hour of labor invested. Productivity becomes a byproduct of the education system, coupled with a strong family-instilled work ethic and pride in getting the job well done.

The best work ethics derive from close families whose combined activities resulted in basic survival of the group sometime in near-term history. The ability to have a high paying manufacturing job allows for better wages and greater buying power, which builds an upper-middle class, which can consume the high-tech products that are the end-result of the passive component supply chain. In China, Korea, Taiwan and other Asian countries, education is held in extremely high regard, and families will move from upscale to low-cost housing to access specific school districts. The costs for private education are much higher in Asia than they are in the United States. In fact, the priority for a child’s education in Asia a typical household budget can exceed that of basic living costs. This is why children in foreign countries begin to perform better than children in the United States after the fourth grade. As a result of differentiation in education between world regions, productivity levels in Japan, China, Taiwan and other SE Asian countries are higher then those in the West.

However, in both Barbados and Costa Rica there is a serious initiative in higher education as a tool for economic growth, and significant government support for the people in terms of attracting business to the Island the exploit the higher education initiatives. It is apparent from the chart above that a combination of productivity and wages moves certain countries (like China and Korea) further into the spotlight for return on investment. How many readers have traveled to Seoul for example, and started meetings at 7:30am that did not end until 10:30pm, and were repeated every day during your travels there? In the Americas, productivity levels are much lower, even when compared to industrialized Europe. In the Americas, a preference for production is apparent in Mexico, Barbados and Brazil, because of higher relative productivity levels, coupled with low wage rate and lower freight charges. This supports continued development of electronic components and subassemblies in these countries. It also supports some level of local expertise in electronics subassemblies, especially in DC motors, lighting, power supplies and television sets.

IRC’s Government Funded 10,000 Foot Expansion in Barbados


Necessity for Design Innovation:
The United States still has depth, breadth and spirit for innovation, which attracts design engineers for advanced applications in legacy businesses like automotive electronics, telecommunications infrastructure, medical, mining, downhole pump, laboratory and defense related endues market segments. There is still dominance in the field of advanced semiconductor technology and the decoupling of these designs. Dominance of Intel, Texas Instruments and AMD in semiconductor devices globally ensure print position for passive component manufacturers as support components for these advanced semiconductor designs. Microprocessor demand is rapidly moving into portable designs, so global print position as a decoupling solution for the Pentium 5 Chip next year would mean years of sustainable revenue in a rapid growth market. It is for this reason that even though Asian manufacturers have low cost production solutions, they still need eyes and ears on the ground in the USA and Europe, and to either develop or co-brand with a local suppliers who have good access to design engineers.

Hourly Wage for Workers in Manufacturing by Country:
According to the Bureau of Labor Statistics, relative costs of labor in 2002 (the latest accurate data available) in Shanghai, People’s Republic of China, are 20% of that in the continental United States. Proximity to the massive Chinese market is the unbeatable
factor, which seriously limits freight costs. The latest manufacturing trend in passive components has been to produce Chinese component manufacturing facilities for 100% China component consumption.

The Caribbean Basin also offers extremely low wages, so the debate about this region becomes one of freight, productivity and raw material costs. It was our intention upon visiting the IRC resistor manufacturing facility to gauge productivity and compare it to that of workers in China. The comparison can only be made between Chinese populations that have conspicuous income, like Shanghai. In fact, the case frequently made for the population of China as a total market is moot, because it is the percentage of that population that can afford to buy goods and services, that have conspicuous income, which amounts to about 350 million people, or approximately the size of the USA and Western Europe. The importance of China is that the percentage of those with conspicuous income is growing at an average annual rate of about 15%, which is much more rapid than growth rates in the Americas and Europe. Another important factor is that labor costs in many other provinces average as low as $0.33 per hour, which means China has tremendous potential for growth in manufacturing and that this specific extension of the Revolution in China can keep growing for 40 years.

Manufacturing and Proximity to Market:
There is little doubt among economists that consumption in the United States and Europe will remain strong, but manufacturing and consumption will continue to move toward the Far East. If the USA and Europe remain strong consumers, proximity of manufacturing to consumer markets, coupled with quality manufacturing and high productivity rates, suggests the Caribbean Basin may offer attractive alternatives to Asia now and in the future. Barbados, our target country, noted their second largest export to sugar cane was electronic components, including the large IRC resistor facility, a smaller Ohmite facility, and a motor drive manufacturer. Similar low cost centers of manufacturing for passive electronic components in the Americas include Kemet (Mexico), AVX (Mexico), Cornell-Dubilier (Mexico), AVX (El Salvador) Bourns (Costa Rica), and EPCOS (Brazil). Each of these manufacturers produce product lines for legacy slow growth businesses in North America that remain intact, with emphasis upon automotive electronic subassemblies, power supplies, HID ballasts, mining electronics, downhole pump toolhead electronics, instrumentation, DC/DC converters, set top boxes and television sets. In Europe, we note a similar occurrence, with EPCOS using sub contractors in Eastern Europe to obtain lower labor costs in regions with high productivity rates among the population.

Finished Resistors Waiting for Export From Barbados to the United States


Freight Costs:
Most of the new production facilities for passive component manufacturing in China (AVX, Kemet, Murata) are designed for the production of passive components consumed locally. Exports from China to the rest of the world are not currently the focus of these manufacturers, because freight costs can be high, with average container costs approaching $5,000 to $6,000 for land and sea shipping to the USA and Europe, including insurance. Freight costs favor Mexico because of the land-only shipping. Another cost is associated with sending representatives to the vendor to negotiate deals and develop relationships. This can cost as much as $50,000 per year per person for the United States and perhaps half that cost for China.

Government Incentives:
As we noted at IRC in Barbados, the government was extremely supportive of local industry and seemed to have an added incentive in their “high-tech” manufacturing labor source because of local declines in the sugar cane industry. The local government helped IRC expand their existing facility by 10,000 square feet and continues to give the company tax incentives in a concerted effort to keep and attract more electronic component manufacturers to the Island.

IRC Resistor Production Facility and HQ in Barbados


Unionization:
The IRC plant in Barbados is unionized, which is surprising and somewhat of a rarity in the Caribbean. The union, we were informed was a legacy from its former ownership by TRW. Unions, or the tendency for the local population to form unions; have discouraged both acquisitions and relocation of production facilities in the past, and can have a negative impact on global government’s wish to attract high-tech, high paying jobs to their respective countries.

Future Valuation of China’s Currency:
What cannot be gauged is the future valuation of China’s currency. When the Chinese Yuan Renimbi is eventually floated, and should it be tied to the Euro, Yen or US Dollar, the value of the Yuan may be much higher than expected. Economists vary on valuation of the Yuan, with some suggesting 8 USD to 1 Yuan, while others suggest the Yuan is about 30% of the USD. However, it should be noted that it costs the equivalent of $35 USD to take a taxicab from the airport to downtown Shangai and about twice that much to take a taxicab from JFK airport to downtown Manhattan, so valuation of the Yuan in real terms could by as close as 2 Yuan for every $1 USD. Should this ultimately be the true valuation of the Yuan, costs to produce in China would skyrocket, making production in locales like Mexico and the Caribbean Basin more cost effective than China. It is for this reason that the Chinese Interior Ministry is pushing back the date when the Yuan is valued.

We note that in terms of massive industrial equipment and related tooling, costs of similar parts with high quality are reported in China as 20% of the cost in the USA, so there is a disparity among valuation.

Summary and Conclusions:
A case is made for making considerations other than labor costs when choosing to produce in China. Also, it is important to understand the huge costs associated with freight and joint venture development with trade partners in China. Also understand that just -in-time delivery can be difficult when core parts are seaborne, so JIT costs may be factored in air freight, which is much more expensive per container than sea freight. Moratoriums on utility costs seem to be the norm regardless of country, but certain countries are making a concerted effort to attract manufacturers. The locations are low cost, but offer proximity to local tourism, ensuring good food and accommodations. This is also applicable in Costa Rica, (also recommended for production of passive components in the hemisphere). The invariable cost is locating a manufacturing plant where living in that country appeals to innovative talent (brand name scientists and production staff) who would jump at the chance to live and work in proximity to it. This attraction is lost where many low cost production facilities are located. In the instances of plant locations like Barbados and Costa Rica, the locations have a tendency to attract top minds in the field, because to live comfortably, have access to a laboratory or production plant and enjoy a tropical paradise is a value-added incentive. Such a balance breeds innovation and offers happiness, especially to the old school people who still do business on a handshake regardless of the brand they carry.

Attractiveness of the manufacturing location to top employees also holds some value in addition to labor rates, unions, freight and insurance costs, JIT delivery for lean manufacturing, and productivity comparisons. The ability to attract inspired leadership to
educate and train holds an additional value that cannot be underestimated when choosing the place to build a production plant.

Footnotes:
{1} It is fascinating to note the increasing number of countries launching s:ales campaigns to attract manufacturing to various parts of the globe. They usually target an industry like electronics to attract high-paying jobs to their countries. Many islands in the Caribbean Basin have been overrun by financial concerns looking for client tax havens. This trend is under extensive scrutiny by the United States Internal Revenue Service, and governments in the Caribbean Basin who are identifying with this are looking to their agricultural markets and finding sugar cane declining rapidly, due to health trends in the US; the only other viable markets center on science, technology and electronics.

[2] Nixon’s visit to Beijing in 1972 caused a rapid increase in demand for satellite, computer mainframe and telecommunications infrastructure equipment for the purpose of embracing peace through communications. During the same year, China committed itself to embark on discovery and development of science and technology to bring the country into the future. This commitment to education in science and technology in 1972 paid off huge dividends for the country from 1995 through 2005, and will continue to do so for the next ten years and beyond.

Readers Of This Article Also Ventured here: (1) Linear Resistors: World Markets, Technologies & Opportunities: 2009-2014 ISBN # 1-893211-24-X (7/2009)