Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
There are times when everything aligns for the good. The Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain is entering its tenth year. Although it has exceeded my wildest dreams and has been an undeniable success, I have been exploring ways to take it to the next level.
Dream #1: More Multi-national As valuable as the Forum is to our North America members, I want the community and venues to become far more multi-national. Although nearly 15 percent of our members are based in Asia and Europe, we have held only 6 Forums outside the US — one in Germany, two in Canada, and three in Mexico. We need a broader international scope to reflect the global electronics industry.
Dream #2: More Industries Although the electronics industry has always been my focus, I want Forum members to benefit from best practices in other successful industries. While it is true we have touched on inter-industry benchmarking in previous Forums (in the apparel and chemistry industries), we can deliver far more thought leadership by pointing members to innovative and applicable practices outside electronics.
Dream #3: Grow Quarterly Forum Membership We have an amazing list of member companies, representing all nodes in the supply chain and leaders from every segment. Expanding on that list will provide the opportunity for more insights and opens the potential for segmented Forums based on member preferences.
Dream #4 – Grow TFI Environment Many of you know that TFI’s environmental consulting practice has skyrocketed in recent years. My dream of late has been to focus my creativity and energy on continuing to grow TFI Environment while keeping our outsourcing and supply-chain consulting strong.
I am pleased to announce that all these dreams are about to come true. The Forum now has new co-leaders: Kathleen Geraghty and Douglas Kent. Kathleen and Douglas are founders of eKNOWtion, a supply-chain education and consulting firm. I have known them both for a long time and they have consulted on numerous TFI projects. They understand our industry from within and have worked with an extensive cross section of companies globally. Their team and network provide broad industry reach in supply-chain and outsourcing strategies. Kathleen is based in North America and Douglas is based in Europe with resources to support the Forum’s growth globally.
When Bruce Rayner leads the July 31st web-based Forum in Boston, Douglas and Kathleen will be there to share their vision for making the Forum program the best ever. Douglas, Kathleen, and I will lead the October 22-23 Forum in San Jose. In addition, I will be involved in the Forum to support our members as part of your Leadership Team.
Thanks to Eric Miscoll, Bruce Rayner, and our full consulting team, we’ve done amazing things with the Forum so far. And I know it is only going to get better.
Kathleen and Douglas welcome emails (write to QuarterlyForum@TechForecasters.com) about your dreams for the Quarterly Forum. I am looking forward to seeing you at the October 22-23rd Forum, if not before.
For one of the sessions at the TFI Quarterly Forum in April we asked the members to break into groups and discuss regionalization and whether a regionalization model for their product manufacturing would make sense.
We defined regionalization as “manufacturing products on the continent on which they are sold.” As Senior Consultant Charlie Barnhart, the session leader, aptly pointed out, regionalization was common practice before the mass migration to China in the last 1990s. Now with higher oil prices and exchange rates that weaken the US dollar, we wanted to know if Forum members - OEMs and Contract Manufacturers - were considering returning to a regional strategy and whether it would become more common practice in the future.
When the nine breakout groups reported back on their discussions, we heard a common refrain: “It depends.” Yes, we are considering/need to consider regionalization and yes, it will become more common in the future. On the “pro” side of regionalization the groups agreed that oil prices and exchange rates were having a major impact on costs, in particular logistics costs. Other benefits include greater customer responsiveness, and faster communication, proximity to developing markets, and environmental considerations.
On the “con” side, the groups agreed that regionalization doesn’t necessarily make sense for high-volume, low-mix production, especially when suppliers are onsite and integrated into the manufacturing process through VMI programs and other supply chain services. And regionalization may lead to higher overhead costs as it necessitates more duplication of effort, and more local management and oversight. Then there are quality concerns - with more manufacturing locations and more complex supply networks, maintaining consistent product quality may become harder.
The consensus was that a hybrid model will emerge. For some products and industry segments, one global manufacturing center makes sense. For others, regionalization is the way to go. It all depends on which way total cost tips the balance.
Let us know what you’re company is considering. Does regionalization make sense, and if so why?
You’ve seen the footage–in a recent TFI blog and elsewhere–of shockingly hazardous recycling methods by poor people in China, India, Ghana, and elsewhere around the world. And if the emotional appeal doesn’t sufficiently motivate your company’s management to double ensure that your products are recycled safely, then consider that yours and your customers’ labels are intact when spotted by reporters, non-government organizations, and other watchdogs. An electronics company’s hard-earned positive brand can be blistered faster than a hand-burned circuit board by “casual recyclers” mining $5 of copper.
Earlier this year, Morgan Johnson of Sims Recycling Solutions (with headquarters in the UK, US, and Australia) spearheaded the purchase of an Internet-based software system that tracks and traces recycled electronics regardless of where products originate, get recycled, or are “touched” en-route. From this WebView Overview, you can see how electronic products in regions as far flung as Malaysia, New Zealand, and Germany are traced by customer, product type, and recycling result.
If you read our blogs at all you know that TFI has been monitoring and forecasting manufacturing outsourcing for the electronics industry, now for 21 years. It’s time that the industry turns its attention to the outsourcing of electronics recycling. Someone in France gives end-of-life electronics to his brother in law, who gives it to…and then…, and now where is your logo lurking?
“Sims doesn’t outsource as much as some other recyclers,” says Morgan Johnson. “Many electronics companies are far flung and are going even further. Normally, insufficient control is asserted over these distant facilities’ e-waste practices; it’s handled locally and not centrally controlled. Better is a consistent service around the globe.”
This blog’s title comes from WNYW’s 10 O’Clock News, which years ago each night began with the simple, but now-famous announcement: “It’s 10:00 p.m. … Do you know where your children are?” Well, it’s 2008 and with responsible recyclers and tracking software available, let’s never again have to wonder where our used electronics end up.
We’d like to hear from you: Do you think it is responsible to have your company’s electronics recycled, without knowing where in the world they are going? And what can be done about it?
P.S. Do you want to take a survey on product reuse and recycling, and receive 2 reports for having done so?
A contract-manufacturer client wrote to us last week about how unfair it is for medical-electronics customers to expect their electronics manufacturing services suppliers to take on significant risk when the medical product fails while in use: He wrote,
“We are continually faced with justifying to potential customers in the medical space why in the EMS industry we limit the amount of risk that we will sign up for. Now in casual conversation with friends from other EMS providers, the consensus is that none of us is willing to take on the amount of risk that we are being asked to.”
We chatted with others of our contract-manufacturing clients who serve both medical and other high-risk-product industries, and heard similar complaints. Catch this one about the automotive industry:
“Automotive OEMs want their contract manufacturers to contractually take on risk as well. If one of the millions of parts we supply to the OEM fails and causes their manufacturing line to shut down, we are responsible for paying for the line’s missed productivity. If we said no, the OEM would not do business with us. So our quality has to be beyond 6 Sigma. If my company can control a process, then I’m comfortable owning some risk for that part. But if a customer-designed product fails owing to the design or other factor beyond our control, it’s inappropriate for us to take on the risk.”
We at TFI think that with contract manufacturers’ razor-thin margins, it’s unreasonable for typically quite higher-margin customers to expect their outsource-manufacturing suppliers to take on product risk based on the customer’s design. The customer, after all, typically owns not only the product design, but also usage instructions, integration into the rest of the product (or body, in the case of medical), and usually a lot of liability insurance.
In some electronics sectors for which contract manufacturing has been prevalent a long time–computer systems, computer peripherals, consumer electronics, non-critical telecommunications, etc.–product failures are rarely critical to human life and significant business interruption.
Speak up on this issue, TFI community: How much risk is fair to expect contract manufacturers to take on, and under what circumstances?
I want to share this short radio interview on what it takes for a technology company to get ahead of the pack environmentally and benefit financially from doing so. Peter Polgar and I were interviewed by Kevin Carroll of the San Diego AeA (American Electronics Association). We also discuss the 3 biggest mistakes technology companies can make when going green. I am speaking at the AeA Operations Roundtable tomorrow (May 14th) on the topic, “Environmental Sustainability from an Operations Perspective: Your Risks, Responsibilities, and Rewards.”
For many reasons, Technology Forecasters has been predicting a return to the regional sourcing strategy that was the hallmark of electronics manufacturing before Y2K and the rush to build anything and everything in China.
(For example, see the May article by Bruce Rayner, TFI vice president and director of consulting and research, in Manufacturing Business Technology, or the conclusions from my presentation at the Spring Quarterly Forum last month: “Recalibrating the Cost of Outsourcing/The Changing Landscape of Outsourcing.”)
In this context, it is useful to review the assumptions – unfounded it turns out — that led the industry away from the regional strategy. I offered this view at the Spring Quarterly Forum last month. These unfounded assumptions, which became rationalizations to justify the move to China, have mistakenly become imbedded in the industry’s collective perception. A mindset correction is needed.
Here are the ones I encounter repeatedly.
Assumption: Systemic quality problems in Mexico and/or Eastern Europe, or products manufactured in Mexico or Eastern Europe are of poor quality. Fact: No statistically significant data has ever been found to support this assertion.
Assumption: It is always cheaper to manufacture products in China and ship them to their point-of-sale than it is to build them in a higher-cost labor region. Fact: Our Outsourcing Navigator Series modeling has consistently shown that on a TCO basis this isn’t true in all cases — and almost never true if materials are sourced at their point of lowest cost and assembly is done regionally.
Assumption: It is necessary to build in China to penetrate the huge potential market in China. Fact: A review of publicly traded global OEMs financial statements clearly indicate this approach has not come to fruition.
Assumption: Cross-hemispheric strategies (i.e., using emerging, remote lower-cost labor to build electronics) provide social and economic benefit to all parties involved. Fact: Given the state of the environment, the global electronics industry and most of the associated economies this presumption seems questionable at best.
Just because everyone else is doing something (like jumping off a bridge) doesn’t mean it is a good idea. Isn’t that something our mothers taught us?
You might know of other baseless assumptions – or you might disagree with these. Either way, let us hear from you.
Technology Forecasters Inc. has issued a mid-year update, based on actual 2007 data, of its five-year growth predictions for electronics manufacturing, revising downward the forecasts for total available market (TAM) and EMS sector growth, and revising upward the forecast for ODM sector growth.
The economic drivers behind the numbers are a clear signal that the U.S. is in a recession, with no sightline to its end point. “I do think we’re in recession,” says Matt Chanoff, TFI Senior Economist, who issued the update at TFI’s recent Spring Quarterly Forum. “And I do think it will take a while to work out the weaknesses that are keeping the economy slow.”
Economic drivers identified as problems in the September forecast, including housing market troubles and high energy prices, have worsened. Chanoff doesn’t expect a drop in oil prices until the summer driving season ends – if then – and expects that the fallout from the burst housing bubble will take even longer to settle.
Housing bubbles are less volatile than other financial bubbles because many of the reasons that go into purchasing or keeping a home are not economic, Chanoff explains. These factors have helped with the long run-up in home prices, but they also mean that re-inflating the housing market will take time. Additionally, it wasn’t clear last September that the U.S. housing slowdown would spread internationally, but many countries, including Britain, Spain, and even some parts of China, are now seeing it, he notes.
Chanoff also identifies a new driver of economic woe that was not obvious in September. “Food prices are ridiculously high at the moment,” he says. “Some of the high price is energy driven. Some is due to decisions to focus on bio-fuels instead of food crops. But a lot of it comes from trade restrictions meant to protect domestic markets.” He notes that India and Vietnam, two large rice exporters, have restricted sales abroad to make sure they have adequate reserves to feed people at home.
How do food prices impact electronics? Higher prices can push would-be, first-time buyers to postpone purchasing cell phones, computers, DVD players and other consumer electronics because the disposable income they had planned to use must be spent to feed the family.
“As the economic boom continues, huge numbers of people have crossed the buying threshold for electronic gadgets in Asia in recent years,” Chanoff notes. “Now high oil and high food prices are raising the threshold.”
In the U.S., consumer confidence and consumer spending remain big wild cards. In his presentation at the Forum, Chanoff cited a recent report by the International Monetary Fund, which states: “The world economy has entered new and precarious territory. The U.S. economy continues to be mired in the financial problems … [that’s taken it] to the verge of recession … The effects on the rest of the world are likely to be significant.”
Chanoff’s assessment: “I imagine we’re going to bump along the bottom in terms of U.S. gross domestic product for a while, probably through the first quarter of 2009. We might rebound and see a strong end to 2009.” In contrast, he notes, most Wall Street analysts are more optimistic, envisioning a rebound toward the end of 2008.
His advice to the electronics industry: “If you accept my argument, you would be more cautious in your inventory and maybe more aggressive in focusing on markets outside the U.S. than you would be if you believe what Wall Street is saying.”
TFI’s revised average five-year growth rates, based on actual instead of estimated 2007 data, are as follows: TAM 6.1 percent, down from the 7.1 percent estimate in September; EMS growth rate, 11.2 percent, down from 13 percent; and ODM growth rate, 18.5 percent, up from 11.9 percent.
And here are the revisions to the 2007 numbers: TFI had forecasted a TAM of $1,241 billion in 2007, revised that to $1,166 billion, or 1 percent lower. TFI revised total outsourcing for 2007 from $276 billion to $292 billion, or 6 percent higher.
These numbers are based on actual 2007 year-end data from OEMs, EMS providers and ODMs, and update the projected figures in our September report, “EMS and ODM Manufacturing 2006-2011: Drivers, Market Sectors, and Geographies.”
The update only looks at the aggregate market, with no market segment or regional breakdowns. For a complete discussion of those, see the October report.
TFI will be examining the root causes of the increase in the ODM growth rate at the July Quarterly Forum breakfast to be hosted by Teradyne in Boston July 31. “ODMs ended up having a banner year in 2007 in top-line performance, with companies like Compal, Quanta, and Asustek seeing very large growth,” he notes.
In the May issue of Manufacturing Business Technology, Bruce Rayner, vice president of consulting and research at Technology Forecasters Inc., offers strategic predictions about electronics manufacturing. Don’t miss his take on matters: “Bold Changes Ahead: Electronics manufacturing rethinks the supply chain; the time is now to review your long-term strategies,” which appears on page 32 of the new issue.
If you need it, here’s more evidence that it is time to get on the bandwagon and develop a roadmap to reduce your company’s environmental impact. The most recent report on quarterly venture capital investment from Dow Jones Financial Services shows that, while VC investing in general was down quarter to quarter over last year, investing in clean technologies matched last year’s first quarter pace.
That’s good news because last year saw a record level of VC investment in “cleantech,” as Dow Jones calls it. A total of $3 billion of VC investing went to cleantech startups in 2007, a 43 percent increase over the previous year.
Dow Jones explains: “Although ‘cleantech’ cuts across all industries, the majority of these companies can be found in the energy, agriculture, and advanced specialty chemicals and materials segments.”
The individual technology matters less than the bigger message implicit in this high-risk investing. VC investors often see the handwriting on the wall before others do. Although these investors take a shotgun approach – recognizing that many bets will fail and a few will pay off big– their investments are a leading indicator of technological trends.
If VC investors are more interested in clean and green than ever, then it can be argued that it is time for companies to confront reality and develop plans for more environmentally sustainable processes and products. OEMs, EMS providers and ODMs that wait to develop roadmaps to reduce their environmental impact risk remaining behind the curve.
As TFI Environment has shown in the past and will continue to show, green (sustainability) can be green (profitable). OEMs and others that have not done the analysis on their processes and products to see where clean/green can also be profitable, are hurting themselves and their shareholders by continuing to lag this growing trend.
As always, we’re interested in your thoughts.
I’ve used this blog more than once to warn that low-cost labor is not always what it seems from a distance. One of the biggest mistakes an electronics OEM can make is to move manufacturing to some remote region just because labor costs appear low. As I’ve stated before, this is not always the best thing to do.
Now, with five years of data collected as part of my Outsourcing Navigator Series, I have an analysis to underpin that argument. I’ll present my analysis, and its implications for sourcing decisions, at next week’s Quarterly Forum. If you’re not attending, we’ll post more of this material on the Web site after the Forum – watch this space.
Just to tease you a bit, here are some general conclusions, based on my data:
Labor costs in all geographies are going up; while lower purchase price is attractive it is not the only price that’s paid; costs above purchase price increase as the supply solution becomes progressively remote; there’s a tipping-point between the capabilities of a supply solution and the requirements of an OEM which — if reached — results in a catastrophic failure. Also, no matter what your personal beliefs are about global climate change, corporate social responsibility or today’s geopolitical situation, the probability of business continuing as usual is zero.
In many cases, outsourcing will ultimately shift back to same-hemisphere solutions, a trend that’s inevitable and beneficial, not only to the planet, but also to our industry and its regional communities. Cross-hemispheric solutions are not going to be tolerated as the standard course-of-business in the future (if for no other reason than the price and consequences of petroleum-based fuels).
For more facts and figures to bolster these arguments, watch this space – or attend next week’s Quaterly Forum. There’s still time to register.
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