Reshoring in Electronic Component Industry

1. Reshoring Electronic Component Industry Association • May 8, 2013

2. Sanmina Profile • Founded in 1980 in San Jose, California • Global footprint: 75 facilities in 25 countries • ~44,000 employees • $6.1B annual revenue (FY’12) • High technology, high complexity products Global, Leading-edge Technology, Engineering, Manufacturing and Services Solutions Company Argentina • Australia • Brazil • Canada • China • Colombia • Czech Republic • England • Finland • France • Germany • Hungary • India Indonesia • Ireland • Israel • Japan • Malaysia • Mexico • Scotland • Singapore • South Africa • Sweden • Thailand • United States

3. Key Markets: Long-term Focus

4. Diversified, Strong Customer Base 4

5. Units Shipped in 2012: 940,220,665 • Top Level Part Numbers: 283K • 3409 Product Transfers in 2012 • Over 9000 Active Suppliers

6. What is “reshoring”? • Strictly speaking… • The repatriation of manufacturing operations from a low-cost country back to the home country • In Washington… • The repatriation of manufacturing operations from CHINA back to the US • Emphasis is on job creation in the US and US manufacturing revival • Size of the reshore doesn’t matter… its jobs • The reason for reshoring is never really understood • Manufacturing expansion in the US is often “confused” with reshoring Sanmina Confidential

7. What is “reshoring”? (cont’d) • In much of the US press… • The repatriation of manufacturing operations from a low-cost country back to the US • Emphasis is on US manufacturing revival “TREND” • Most often, size is irrelevant • i.e., each instance is proof of the trend • Manufacturing expansion in the US is often “confused” with reshoring • The low-cost country is most often understood to be CHINA • MEXICO enjoys a dual status • Offshoring from the US to a low-cost country, OR • “Reshoring” when production does not quite make it back to the US from Asia… Sanmina Confidential

8. What is “reshoring”? (cont’d) • In reality… • The transfer of SOME manufacturing production • From a low-cost country back to the home country OR to another country, low-cost or not • Applies to in-house AND outsourced manufacturing • Several factors make up the decision to move • Wage gap is NEVER the only reason • In all cases, the move makes BUSINESS sense • The production transfer is most often program/product AND region/market specific • Typically affects a product intended for a specific market Sanmina Confidential

9. What is “reshoring”? (cont’d) • In reality… (cont’d) • Reshoring is “largely a US phenomenon”—The Economist • In Europe • There was less offshoring to begin with • Many European companies are family owned • Natural allegiance to home country • Workforce is “still inflexible and costly”—The Economist • Labor laws in some countries are very restrictive • Very difficult and expensive to lay people off • And many European companies are “near-shoring” to Eastern Europe & now Morocco • Equivalent to Mexico for US companies Sanmina Confidential

10. Why reshore? • Typically several factors that make sound business sense • Manufacturing wages • Rising fast in China, SAP • Substantially lower post-financial crisis in the US • Use of two-tier wage structure (GE, Ford, GM, etc.) • Rising transportation costs • Proximity to end market • R&D specific to market, faster time to market • Falling energy costs in the US • US productivity is very high • And can be increased still through automation • Government incentives—US stimulus, Canada FIT program Sanmina Confidential

11. Why reshore? (cont’d) • Cost gaps, then & now Sanmina Confidential

12. Why reshore? (cont’d) • Primary decision drivers Sanmina Confidential

13. The Tipping Point Seven Sectors in 5 years will reach a Tipping Point where the rising costs of producing in China will make it more economical to manufacture goods consumed in the US to the US. Sanmina Confidential

14. Why reshore? (cont’d) • When to reshore where Sanmina Confidential

15. How much reshoring? • “Mostly isolated & anecdotal evidence” • “The idea that American manufacturing is on the cusp of a renaissance is everywhere these days—except in the hard numbers.”—WSJ, Apr 2013 • “The number of firms known to have ‘reshored’ manufacturing to America is well under 100”—The Economist, Jan 2013 • “The continued outflow of capacity from advanced economies will more than offset any capacity being reshored.”—The Hackett Group, May 2012 Sanmina Confidential

16. How much reshoring? (cont’d) • Moves between low-cost countries trump reshoring… Sanmina Confidential

17. How much reshoring? (cont’d) • From tiny companies… • Chesapeake Bay Candle Glen Burnie, MD • Rising labor costs in China + improve response time to customers • ET Water Systems San Jose, CAirrigation controls • To improve quality & response time to customers • K’NexHatfield, PAplastic toys • To protect remaining jobs at its US factory • Sleek Audio Bradenton, FLearphones • To improve quality Sanmina Confidential

18. How much reshoring? (cont’d) • To industrial giants… • Caterpillar Texasexcavators • Emerson Mexico & N. America • For customer proximity • Ford Michigan & Ohiomedium-duty trucks • To save jobs at existing production facilities • Otis S. Carolina elevators • To stay close to R&D + reduce logistics costs • GE Kentuckyhome appliances • To stay close to R&D Sanmina Confidential

19. Obstacles to reshoring • More than wages… • “As the gap in worldwide wage rates narrows further, it will become more obvious that other factors, such as • skills, labour law, clusters of industries, infrastructure, tax and regulation • are playing an ever more important role when companies decide where to put their production.” Sanmina Confidential The Economist, “Outsourcing & Offshoring,” Jan 2013

20. Obstacles to reshoring (cont’d) • It’s not easy to “come home” • Inadequate supply chain • Not all components are available in the US today • Need for further automation of existing manufacturing process • Need to redesign product to accommodate • The new process • The supply chain holes • The local market tastes • Willingness to accept less than 100% “Made in America” Sanmina Confidential

21. Obstacles to reshoring (cont’d) • Case study—K’Nex, plastic toy maker, PA • Reshored most of its production in order to stave off major layoffs at manufacturing facility in Hatfield, PA • Obstacles • Redesigned some of the toys to minimize manual labor required • Switched some parts from wood to plastic • Other parts redesigned to snap together & kids perform final assembly • Supply chain constraints—unable to source competitively in the US • Battery-powered motors, wooden log cabins, parts with rubberized coating • Automated packaging process—now done by Baxter (Rethink Robotics) • Benefits • Faster response to customer demand • Greater control over quality & materials • Grew its US workforce 33% over last 4 years • “MOSTLY Made in America” toys Sanmina Confidential

22. “Regionalization” is the real trend… • Offshoring has evolved into regionalization • “The notion of offshoring is an odd one for a truly international company. The ‘home shore’ for Siemens is now as much China and India as it is Germany or America.”—Peter Löscher, CEO, Siemens (The Economist) • Many global companies would agree… • That’s because “low-cost” countries have become markets of their own and, as such, require local manufacturing • Airbus, Bombardier, Caterpillar, Ford, GE Aviation & GE Healthcare, Philips Medical are only a few of the global OEMs that • May reshore “pertinent” production, BUT • Are also expanding “manufacturing in China for the sake of China”—The Economist Sanmina Confidential

23. “Regionalization” is the real trend… (cont’d) • Foreign global OEMs choose the US for “regional” production too… • And are establishing, or expanding, a manufacturing footprint • Airbus First plant Alabama A319/320/321 • The US is its largest market for these aircraft • Lenovo First plant N. Carolina PCs • Toyota Expanding Kentucky Lexus ES • The US is its largest market for this model • Vallourec New plant Ohio Steel tubes • The French industrial is growing in the US oil & gas market Sanmina Confidential

24. Summary • Benefits • Rising labor rates in Asia will drive reshoring • Timing is about 5 years out • Rising transportation costs • Proximity to end market • Falling energy costs • US productivity is very high • Challenges • Skilled labor will continue to be an issue • Supply chain challenges will remain Sanmina Confidential

26. Sources • The Hackett Group, Reshoring Global Manufacturing: Myths & Realities, May 2012 • The Economist, Special Report: “Outsourcing & Offshoring,” January 2013 • Bloomberg BusinessWeek, “Reshoring of Jobs Looks Meager,” July 2012 • Financial Times • “GE takes $1bn risk in bringing jobs home,” April 2012 • “Reshoring Jobs from China won’t happen,” October 2011 • IndustryWeek, “Reshoring is Not a Trend,” March 2013 • Manufacturing.Net, “The Cost Gap and Reshoring Of Chinese Manufacturing Jobs,” May 2012 • Thomas.Net Industry Market Trends, “Offshoring vs. Reshoring: The Business Perspective,” July 2012 • Wall Street Journal • “Signs of Factory Revival Hard to Spot,” April 2013 • “Toyota to Start Making Lexuses in U.S.,” April 2013 • “Offshored Jobs are Coming Back. But How Many?,” March 2013 • “A Toy Maker Comes Home to the U.S.A.,” March 2013 • Company websites Sanmina Confidential