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Offshore Manufacturing: A Risky Proposition?

At a recent government event in Washington, D.C., the president of Panasonic Computer Solutions made a big statement: "All our competitors moved engineering and manufacturing to third-party partners."

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Jill R. Aitoro is
senior editor at GovernmentVAR.

Why is that a big statement? Beyond the fact that he made a sweeping generalization that some of those competitors might take exception to, the significance of that statement by Panasonic's Rance Poehler lies in the fact that, in a considerable number of cases at least, it's exactly true. And for government customers and the solution providers that sell to them, that's something to seriously consider when making purchasing and partnering decisions.

Two reasons exist for why this trend is happening. The first is simple cost-cutting. Manufacturers can save a lot of money by relying on original design manufacturers, or ODMs, that can make their products for much less, thanks to cheap skilled labor. This is nothing new, of course. The second reason for the trend that's more specific to the federal market is the need to comply with the Trade Agreement Act (TAA). Vendors based in countries that aren't authorized to sell to the U.S. government have to find an alternative, which often leads them to the very same ODMs that others rely on to cut costs.

But with manufacturers removed from the process, issues can arise. Beyond quality concerns, duplicate products are made and sold to the gray market or, worse yet, originals are reverse-engineered for the purpose of counterfeiting them across Asia. The experience of American DataComputer Products is a perfect example. The Tampa, Fla.-based solution provider purchased Cisco switches from a larger integrator that opted to source the equipment through gray-market suppliers. The switches, some of which were installed at the Department of Defense, appeared to be counterfeits from China.

That's exactly what the government doesn't want to happen.

Obviously, original equipment manufacturers (OEMs) aren't intentionally turning around counterfeit goods when they filter manufacturing to Asia. They don't want to see fakes any more than the government does. But the strategy opens the door for that to happen, which introduces the very risk many of these OEMs were trying to avoid in the first place: violation of the TAA.

Plenty of people lump this issue together with the politics of offshoring, arguing that vendors cause the problems when they decide to manufacture outside U.S. borders. I'm not one of those people. Outsourcing serves a very real purpose, and, frankly, it's inevitable in a global economy. I say the issue is more granular. Vendors indeed introduce this problem, but not as much when they decide to offshore these processes as when they decide that an overseas partnership is the way to go about doing so.

Obviously, in a market that depends more on the channel than most any other, partnering is an essential way to keep everyone in business and meet customer demands. But the decision to partner for the actual engineering and manufacturing of products that could land in the hands of federal customers carries with it a degree of irresponsibility. Offshore to save costs and enable TAA compliance, yes, but not at the risk of sacrificing control over processes, intellectual property and, subsequently, security. Simply put, those that deal in government contracting have to be more responsible.

So what exactly are the alternatives? Vendors have to hold offshore locations to the same standards as the government headquarters, which is difficult to do if they're not in complete control of how things are run.

Or maybe they should handle the manufacturing of products for federal customers differently than they handle it for the commercial sector. That's perhaps an expensive option, but it's one that would alleviate some of the risk. Another alternative for vendors is to follow Panasonic's lead, avoiding these issues altogether by keeping product design, engineering and manufacturing in-house.

In the meantime, executives such as Poehler will continue to use that fact as a powerful marketing tool to the government community. And who can blame them?

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