By Drew Wilson Courtesy of EE Times Europe (09/04/2008 8:54 AM EST)

BERLIN — Soaring oil prices, a falling dollar, and rising wages are undermining some of the reasons electronics manufacturers moved offshore, which may result in the return of production closer to home, according to a report in the McKinsey Quarterly.

In 2003, manufacturing a midrange server in Asia rather than the US resulted in a $64 per unit cost savings, even after total landed costs were factored in, according to the authors of the report, Ajay Goel, Nazgol Moussavi and Vats N. Srivatsan.

"Today, economic conditions have reversed it," according to the report. "After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative — a burden of an extra $16."

Wage inflation and the impact of higher oil prices on freight costs have combined to ruin the offshore cost advantage. An average production worker in China, paid $1,740 a year in 2003, makes $4,140 today, while the cost of shipping a standard 40-foot container has tripled since 2000, they write.

"The server now could be produced more economically at a plant closer to consumers (in Mexico, for example, where the mix of logistics and labor costs is more favorable)," according to the report.

"Although McKinsey analysis shows that for a number of high-tech products, costs have changed enough to undermine the benefits of Asian production significantly, the decision to rein back offshoring isn't straightforward."

Before making a decision, global supply chain managers need to carefully consider factors such as speed, skilled labor availability, the potential for further productivity gains in Asia, one-time transition costs, the local import and tax implications and organizational interfaces, according to the authors.

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