Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
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.
Here’s a situation we often encounter when we work with OEMs to create roadmaps for reducing the environmental impact of their companies and products.
The financial analysis of the roadmap inevitably shows a significant return on investment (ROI), and largely on that basis the top executives readily sign off on it. When we discuss the roadmap with mid-level managers and rank-and-file employees (the best source of specific environmental initiatives, by the way), we get a different reaction.
They often want to know if ROI is the only reason the executives are making a commitment to reduce waste and develop more efficient products. Many workers hope the company is going green because it is the right thing to do, whether it improves the financial picture or not.
From our perspective, neither dollars nor sentiment is the right or wrong motivation. In fact, the two are a potent combination, as I explored in my book on the topic. What could be better than to improve the financial picture and help the environment? Has there ever been a better win-win situation?
Yet we understand that an environmental roadmap is important to the company’s internal brand. If employees believe the only reason the CEO is doing this is to improve financials - which is likely to boost his or her own compensation as well - then their cynical attitude can hurt the internal brand. We tell employees the company has decided to eliminate waste, design products for environmental improvement, and take other measures for both reasons.
Executives must maintain a delicate balance. They are constantly under bottom line pressure. But they sure want employees to feel good about the corporate social responsibility of the place they work. At TFI Environment, we think it best to acknowledge both motivations openly and honestly, while keeping in mind the one may mean more to rank-and-file workers than the other.
With nano-thin margins in many electronics segments, it is only natural that OEMs are looking for the next low-cost place to build. Vietnam, which pops up on most radar screens, might be that place – or might not. The Asian low-cost leader has an upside and a downside.
At Technology Forecasters’ Quarterly Forum on April 23 and 24, Matthew Chanoff, TFI senior economist, will share his recommendations for outsourcing in Vietnam based on his quantitative analysis, and his recent interviews and plant tours in Vietnam. TFI will also release his report to members.
To pique your interest, let’s take a look at one issue, which Chanoff will examine in more depth: The labor force.
Vietnamese skilled workers are highly skilled, proficient in English and driven to learn what they don’t know. There just aren’t enough of them. This land of 80 million people has a skilled labor shortage. It should come as no surprise that even though Vietnam has a labor cost advantage, wages are rising.
One Western executive says wages have skyrocketed 300 percent for top performers in the four years he’s been in Vietnam.
“The challenge everyone is beginning to face now is the relative lack of skills and experience versus the demand,” says Lorien Hamilton, operations director of Technology Resources Group, a Hanoi-based software reseller and service firm.
Hamilton, who serves as vice chair of the Information, Communication and Technology Committee of the Hanoi chapter of the American Chamber of Commerce in Vietnam, says turnover rates are as high as 40 percent. “The more skilled, experienced, and internationalized the person is, the more difficult it is to keep them. That individual can change jobs and double his salary every six months to a year.”
Unlike China, where there are literally millions or workers to do fairly low-tech production line work, Vietnam has a far smaller pool of people to draw from. Hamiton notes that GDP is running at more than 8 percent in Vietnam, second only to China, but that people often overlook the inflation rate, which is between 15 and 20 percent in Vietnam. “We recently had a big pay review within TRG and it seems to be much harder to match expectations with a sensible pay increase,” he says.
Jason Craft, managing director of Spartronics, the Vietnamese subsidiary of Sparton Corp., an EMS company based in Jackson, Mich., says retaining staff is a challenge. Sparton, a high-mix, low-volume provider with about $200 million in annual revenue, built a factory in an industrial park near Ho Chi Minh City, and began to operate in 2005.
Craft says turnover can be brutal, but Spartronics has a relatively small churn among its 150 employees. He attributes that record to the fact that he’s the only Westerner in the plant, and that all his key staff positions are Vietnamese, which gives others in the workforce hope of being able to advance.
At most foreign companies he knows in Vietnam, the top two layers of management are ex-patriots, Craft says. His management team is Vietnamese, and has proven highly capable. At the time we talked, Craft had just completed home leave: “My staff proved they can do it. I’ve been in the U.S. for month and they’ve run it without me.”
This is an opportunity they would not find at most other plants. “Some guys working for me worked elsewhere and were three levels down and were going no higher,” Craft says. “That is why they came to work for me.”
Craft has seen Western companies struggle because they don’t pay attention to basics. “I’ve learned a lot of things about the Vietnamese and how to treat them. You’d better know what motivates and drives them so you can create benefits and retain them,” he says.
Vietnamese workers are extremely loyal when given a chance to keep learning, he says. “Right now they really value education and the challenge of learning things new. They’re not much different from Americans in this regard.”
Whatever the Vietnamese lack in engineering education, they seem to make up for with a thirst for knowledge. “If they don’t know something, they go learn it in a couple of days,” he notes. “My engineering force here is almost as competent as the one in the U.S”
Craft says members of his management team all speak English, and the entire workforce understands enough English that he can deliver instructions in English. He believes he has scored points with his management and engineering teams by training them in modern management practices, including Six Sigma and Lean, which they’ve been able to apply in the plant.
Much of what Craft advises seems like Human Resources 101, but all too often, companies forget the basics. In the end, what it takes to retain employees in Vietnam is the same thing it takes anywhere – the right kind of TLC from management.
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The primary driver for Aruba Networks’ decision to select SAP software is to scale and grow its business, have immediate access to accurate data, real-time business processes, and improved connectivity to suppliers.
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With all the emphasis on outsourced manufacturing, the electronics industry should also be looking at other parts of the supply chain as candidates for outsourcing. For example, since oil prices are driving up transportation costs, OEMs need to consider not only how far flung they want their supply chains to be, but take a hard look at whether outsourcing transportation and logistics is more cost effective.
One of our Quarterly Forum reports last year examined outsourced logistics. In our study, nearly half of the OEMs reported that logistics were still the primary responsibility of an internal department, but they were keen to outsource it when the providers could prove they were up to the various tasks.
More recently, Technology Forecasters has been commissioned to conduct a benchmark study of the OEM logistics best practices. The client that commissioned the study would like to get as much input from as many OEMs as possible. So, we’re offering you a chance to participate in a survey that will take about 20 minutes.
There’s something in it for you, too, if you take the survey. The client will allow us to send you the executive summary, so you too can learn more about best practices in electronics supply chain logistics. Combined with our study of last year, we think you’ll have a good idea of the state of the art. So, please take some time and click to the survey.
Here’s something I encounter more often than I should. An OEM with an industrial product asked me to recommend some contract manufacturers. The product needed to be built for rugged environments, the OEM needed to quickly get into production, and it didn’t have a lot of money to spend vetting CMs. The executive asked me to recommend a short list. I gave him two names.
The next time we talked, he said he had a problem. The CMs I recommended were already doing the kind of work he wanted done and that made him nervous. Were the OEMs of these other products direct competitors, I asked.
No, he said, but the products were directly comparable. He said he didn’t want the “risk” of taking the job to a CM already doing this type of work for someone else.
I told him this was exactly why I sent him to these CMs. They know these types of products and therefore will have an easier time moving up the learning curve. Given his requirements, the last thing he should do is go to a CM with no experience. That would be a real “risk.”
Then I explained there are three reasons to use a CM with experience in like-kind products:
1. If the CM builds similar products you might get a better deal on materials because it will have established supply-chain relationships.
2. The CM is less likely to pad quotes to buy new equipment or hire needed expertise because it already has it.
3. The probability of failure of the supply solution – and therefore risk — is reduced, not increased, by experience and like-product know-how.
When I explained the reasons he seemed to get it and, as of this writing, was reconsidering my recommendations. Common sense? Maybe, maybe not. The outsourcing landscape is complex and caution is justified. This is one of many topics we discuss in the Outsourcing Navigator Series. So check it out — you’ll feel better!
And if you have any experiences with CMs manufacturing products similar to those from other OEMs let us hear from you.
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