“Designed by Apple in California. Assembled in China.” This is the statement on the back of every iPhone that neatly sums up how most major western brands approach manufacturing. Huge corporations retain their western sensibilities by basing their global design and marketing functions in their domestic markets, but keep costs low and reach emerging markets by outsourcing their supply chain to the Far East.
Yet as China’s economy flounders, consumer attitudes shift and manufacturing technology advances, will growing market demand for more customised and locally made products lead to a move away from offshore mass production?
Global markets are still readjusting to the dramatic crash in Chinese stocks over the summer, which culminated in an 8.5% drop in value of the Shanghai main share index on 24 August, partly driven by a steep decline in its manufacturing sector that serves brands around the world. In September, China’s factory activity fell at the fastest rate for six and a half years.
Its effect could also have far-reaching consequences for how brands organise their global operations – and on the kinds of products reaching end consumers as a result.
Brand risks from China
There are already signs that certain brands are moving away from China to meet a rising demand from their home markets for locally made products. Last month, Reuters reported “a resurgence in British textile manufacturing” as output grew in the first half of this year. It noted that a series of clothes makers have opted to make Britain their production home, including Albion Knitting Company, a supplier to luxury brands such as LVMH and Gucci, which this year returned to London after 18 years in China.
Other brands may consider abandoning Chinese production lines as the current market volatility reduces the prospect of sales growth from Chinese consumers. The devaluation of China’s currency in August, for example, resulted in a sharp fall in the share value of luxury British brand Burberry. The company made 37% of its revenues in the Asia-Pacific region last year, and much of that was in China, so the brand is heavily exposed to Chinese market conditions.
BMW, meanwhile, experienced its first sales drop in China for a decade during the second quarter of this year. The company confirmed that the 4% year-on-year decline in May, following years of double-digit growth in China, had dragged down its overall performance. “If conditions on the Chinese market become more challenging, we cannot rule out a possible effect on the BMW Group’s outlook,” it said in a statement.
3D printing comes of age
In addition to these economic challenges, emerging technologies such as 3D printing are enabling companies to make complex products in their domestic markets – thus reducing their reliance on Chinese factories.
Although businesses have so far failed to adopt 3D printing on a large scale, the technology, which allows single products and parts to be manufactured quickly from materials including plastics and metals, is beginning to gain traction with mass market brands. Earlier this year, 3D design company Autodesk agreed a partnership with Mattel that will see the toy maker launch a series of apps enabling consumers to design and customise their own 3D-printed toys.
Mattel has not yet set a date for when it will roll out the service, but the deal reflects a wider strategy by the company to move away from mass production in favour of personalised, direct-to-consumer services.
“Technology is changing daily and by harnessing Mattel’s expertise in play and Autodesk’s expertise with creative apps and 3D printing, we’re able to offer a new kind of 3D design experience,” claims Mattel senior vice-president Doug Wadleigh.
During a presentation at the Dreamforce conference in San Francisco last month, Autodesk claimed that several factors are combining to gradually alter the way that businesses manage their global product development needs.
These factors include the recently developed ability to 3D-print metal structures and the rise of crowdfunding as a way of quickly getting new products off the ground. Autodesk also highlighted the growth of hi-tech microfactories: small facilities that use the latest robotic and manufacturing technology to produce customised products at speed.
The rise of microfactories
The move towards customisation is allowing companies to relocate certain elements of their production processes near to their domestic base. The result is that brands are able to not only design and manufacture goods tailored to the needs of the local market, but also to test new products with their target customers without committing to a large, expensive production run.
Earlier this year, aerospace group Rolls-Royce unveiled a prototype metal engine part to mark the opening of a new £15m manufacturing unit at the UK government-backed Manufacturing Technology Centre (MTC) in Coventry.
The MTC, which opened in 2011, provides a collaborative environment for companies and academia to develop new manufacturing solutions by experimenting with the latest technology. In addition to Rolls-Royce, the centre counts Airbus, Nikon and Unilever among its 85 member companies.
Similarly, in the US, technology and healthcare conglomerate General Electric (GE) last year launched FirstBuild: a co-creation community for designing “the next generation of major home appliances”.
“The challenge [for GE] is breakthrough innovation,” says Wayne Davis, innovation and marketing leader at GE Appliances. “We know how to make washers and dryers, car companies know how to make cars – but if it’s something that’s truly unique, making a decision to invest millions of dollars and make hundreds of thousands of something is tough.
“The idea here is to get ideas from everywhere, build it at a smaller scale and test it in the market. That makes it a lot easier to scale up.”
The FirstBuild community is a joint venture between GE and Local Motors, a vehicle maker specialising in micro-manufacturing. It includes an online portal where designers can come together to share and discuss ideas for new products as well as a microfactory based in Louisville, Kentucky, where engineers build the products using the latest tech, including 3D printing (see case study, bottom).
This setup allows GE to experiment with its product development – particularly in niche areas such as connected appliances – thus removing the danger that it will invest heavily in mass producing an unpopular or unsuitable product.
FirstBuild has so far created and released nine products for sale to the general public, including a smart cooktop and smart refrigerator. The online community has 8,000 registered members, with those who contribute original ideas receiving royalties if their products make it to market.
Supply chain conundrum
As the name suggests, a microfactory is limited by its production capacity. FirstBuild’s facility, for example, only manufactures up to 1,000 items during any single product run. If the product is selected for the mass market, it is moved to GE Appliances’ regular factories, which are located in the US. This is a source of pride for GE and is exploited by the company’s marketing, which claims it is “revitalising manufacturing in the United States” by keeping its production at home.
However, for most major brands China is still the go-to place for their everyday manufacturing needs. Although 3D printing is starting to play a bigger role in the product development phase, the technology is limited to making a relatively small range of finished parts and is primarily used for prototypes rather than final products.
Peter Williamson, professor at the University of Cambridge’s Judge Business School, believes that the idea of global companies “reshoring” production from China has been hugely overblown. He notes that many global brands are reliant on China for their entire supply chain given the lack of equivalent infrastructure in many western countries.
“Very little of Chinese manufacturing is pure assembly — it is a whole swathe of supply chain activities,” he says. “The oft-quoted study of the iPhone having minimal value added [in China] is now grossly out of date; a whole range of the core components including microphone, antennae and screen are made in China.”
Williamson accepts that production costs are rising in China – partly as a result of a government policy, beginning in 2013, to increase the minimum wage by 84% over five years. But he also notes that workforce productivity is surging and that despite its recent stock market troubles, China remains the world’s second largest economy and the largest market for many global products.
“Why would anyone reshore production back to the west to re-export [the products] back to China?” he asks. “There will, of course, be limited reshoring of manufacturing that is extremely time-sensitive or customised, using technologies such as 3D printing.
“Some luxury products and some foods that are basically marketed on their foreign provenance will also be made in Europe. But I believe these will be the exceptions – the large volume manufacturing will stay in China because that is where the scale, the supply chain and the market is.”
The home-made appeal
However, if China is still the dominant centre for large-scale manufacturing, it is not necessarily an attractive destination for small companies or startups seeking to retain control of their manufacturing processes. Dublin Design Studio, a new company set up last year in the city’s Docklands Innovations Park, has opted to keep all of its manufacturing in Ireland as it prepares to launch its first product Scriba – a stylus for Apple mobile devices.
The product was partly funded via the crowdfunding website Kickstarter with further support from New Frontiers, an Irish government-backed business incubation programme. Chief executive David Craig explains that he decided to keep production in Ireland – on a limited run to begin with – in order to refine the product during the early stages of the launch.
“Although we might have saved some money going straight to the Far East, being able to have control and have people on the end of a phone who can help us fix things – rather than having to jump on a plane to resolve a problem – will make it much smoother for us,” he says.
For American bicycle, watch and leather goods maker Shinola, meanwhile, the manufacturing base is inextricably tied to its brand values and purpose. The company was set up in Detroit in 2011 and runs both its head office and its manufacturing facility from the city’s College for Creative Studies.
The brand aims to challenge the notion of Detroit as an unviable economic centre – an image created by the 2008 global financial crash and the woes of the American car industry based in the city – by bringing back manufacturing and highly-skilled jobs. The company also fosters a collaborative approach to manufacturing through a partnership with Ronda, an established Swiss watchmaker that helps to train Shinola’s Detroit-based staff.
Basing all of its operations within the college enables Shinola to develop and roll-out new products at high speed, says CMO Bridget Russo. The company is planning to expand into new product areas next year, including audio equipment, and also intends to move into a larger London store after opening its first shop in the UK in 2014.
“As far as we know, we’re the only instance where we have both manufacturing and the headquarters of a brand all based within a design school,” she says. “Because design and prototyping all happen here, our designers can literally come in with an idea in the morning and have a prototype of that product at the end of the day.”
While Russo notes that some people will simply buy Shinola products because they like them, she believes that many others are drawn to the brand because of its approach to manufacturing and its Detroit heritage. This was crucial to building the brand’s story and attracting early adopters, she explains, and will remain central to its marketing messages on both online and offline channels in the future.
“Even if consumers don’t have a connection to Detroit, it makes a difference knowing that the products have a strong story behind them and that by buying a Shinola product they’re helping to create jobs in Detroit,” she says. “But it’s also a beautiful product, so all those things factor into the desirability of the brand.”
Case study: GE FirstBuild
General Electric’s (GE) co-creation community FirstBuild, which launched last year, is based on the idea that crowdsourcing is the best route to “breakthrough innovation”. The online presence for the community, FirstBuild.com, works like a social network where design enthusiasts can share, discuss and rate each other’s ideas for new home appliances. This includes uploading sketches and detailed plans for their designs.
Ideas that gain the most traction on the site are taken by GE, in partnership with micro manufacturing specialist Local Motors, and turned into products in a hi-tech micro factory based in Louisville, Kentucky. Anyone with an idea can sign up to the community, which so far has 8,000 registered members. Contributors are also invited to get involved in the production process at the microfactory, which incorporates the latest 3D printing, laser and robotic technology.
“We realised that there are people out there with great ideas beyond advanced manufacturing engineers,” says Wayne Davis, innovation and marketing leader at GE Appliances. “We have home enthusiasts, tinkerers, hackers and regular consumers who have great ideas about what they would want in their kitchen or their laundry room, and we’re giving them a platform to submit those ideas.”
GE has so far created nine home appliances for sale to the general public via FirstBuild. These are being sold online, as well as through GE Appliances’ own retail channels, with those who contribute the idea receiving a royalty payment.
FirstBuild has also generated interest in its manufacturing projects via the crowdfunding website Indiegogo and by putting on ‘hackathon’ events for the local tech community. Davis claims that numerous large manufacturing companies have taken an interest in the FirstBuild model as they look to find their own ways of designing and making innovative products at greater speed.
“With the major manufacturers, we probably give a tour per week to somebody,” he says. “This is unique in the manufacturing world.”