Overseas Manufacturing and Assembly

In the late 1960s, I worked for a consulting company in California. Among other things, we advised electronics companies about so-called low labor cost countries. We conducted feasibility studies for large semiconductor companies like Fairchild, Motorola, etc. And for large manufacturers of television sets.

There were many criteria in suggestion a plant location. Labor costs was just one and seldom the most important. Availability of skilled labor, raw materials, and a stable government were important. For semiconductor assembly plants we found a correlation between a tradition of needlepoint work and the assembly of semiconductors under a microscope. A semiconductor plant was located outside Lisbon in Portugal based on the local needlepoint tradition.

Many areas had much lower labor costs than the ones selected. One reason they were rejected was unstable governments. The locations selected early were Hong Kong, Taiwan, South Korea, Singapore and Malaysia.

Hong Kong was very popular and after a short time, competition for the available labor draw wages up-from seven U.S. cents an hour to eight. That price difference was enough for U.S. manufacturers to look for alternative locations. The next area discovered was Taiwan, where the wages were still seven cents an hour.

What do Hong Kong, Taiwan, South Korea and Singapore have in common, at least at that time? Stable governments headed by dictators-if we are allowed to refer to the British Governor in Hong Kong as a dictator, granted a very mild one.

Were the laborers exploited? Probably not, compared to local conditions. The U.S. owned electronics factories paid more than the locally owned. The workers loved to work in American factories.

Is it necessary for semiconductor companies to assembly in low cost countries in order to compete? No, IBM, Western Electric (now part of Lucent Technologies), and Texas Instruments took another route. They introduced highly automated machinery in their U.S. factories. The reason they could do this, was and is their long runs of identical products.

The Government of Taiwan saw the benefits of having American plants and tried to attract more. My employer at the time, the consulting company, was asked by a Taiwanese development agency to try to find more American companies for Taiwan.

Several U.S. companies started to assemble television sets on Taiwan. This could be done at such a low cost that it was even economical to fly the sets back to the U.S. for distribution. There are other reasons why it is more economical to fly products rather than using ships. One is that heavy crates are not required and the packaging costs are much lower for air freight. Another is the shorter time to delivery.

The U.S. laws on customs duties helped. American companies in the U.S. paid duties on the value added overseas, only. They did not have to pay U.S. duties on components exported from and re-imported into the U.S.

Besides making products available to Americas at lower prices, consumers of American products evolved in SE Asia. The industrialization of Taiwan started with the electronic industry, and today the average income per capita is close to half of that in the U.S. That of South Korea is about one-third.

U.S. export of electronics, information and communications products almost balances the import of the same categories of products. We have a positive trade balance with Hong Kong and a negative one with Taiwan, while export and import trade with South Korea is close to being in balance

Bertil Lindberg

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Last revised July 16, 2003.
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