Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
Here’s a mid-year prediction from Technology Forecasters: Due to the growing desire to reduce their carbon footprints and their costs, OEMs will swing from centralized manufacturing outsourcing (e.g., in Asia for global customers, anytime, all the time) to more balanced regional strategies than we’ve seen in the past five years.
We believe the lean and green movement will be one of the drivers of a massive swing to regional manufacturing. Rising costs in Asia and improving quality elsewhere will also drive this shift, but the big push will come from green demands. As OEMs seek to reduce their carbon footprints, they’re going to want to manufacture closer to end markets. Air, ocean, and land transportation are gross contributors to exhaustion of non-renewable resources and the ill health and environmental effects of burning hydrocarbons.
We’ll go so far as to say it is not a matter of “if” this happens, but when. That is, we predict consumers and business customers will demand a reduction in the carbon footprint of the products they buy, and OEMs and their partners will respond by aligning manufacturing to serve regional customers. Some major electronics OEM executives to whom TFI has spoken expect a rapid shift in consumer sentiment regarding carbon footprints in the next 12 to 24 months and are preparing their stategies now.
The most nimble and courageous contract manufacturers will lead the way. This represents an opportunity for mid-sized and smaller regional CMs, who will find themselves on more equal footing with the largest CMs, and thus able to win new business.
In the months ahead, our OEM, CM, and component supplier members will hear more from us about what they can do to competitively and intelligently use manufacturing and logistics strategies to reduce costs and meet carbon-reduction goals.
We’d like to hear from OEMs and CMs on this: How soon will we see the swing to more regional manufacturing?
Voluntary carbon offsets are a minor but useful item in the tool kit for reducing greenhouse gas emissions. Their value is mostly symbolic, a way to raise awareness and to make a statement about one’s commitment to reducing emissions.
Families, individuals or companies can buy voluntary offset credits from any of several private companies that direct the money (minus a commission) to wind farms, solar installations and other projects that reduce carbon emissions. The idea is, if you pollute in one place, you can theoretically reduce your net climate impact by buying credits and contributing to energy efficient projects somewhere else.
I agree with those who think this is a pretty good idea, if only because it makes people aware of the carbon emissions they are creating. I don’t entirely agree with the critics who scoff at the notion as no better than the indulgences that the Catholic Church sold during the Middle Ages, but I can see their point.
Voluntary efforts should not be confused with the rigorous carbon cap and trade programs now established by the European Union and elsewhere under the Kyoto Protocol. The EU has the most rigorous program I know. Each business must meet an assigned carbon emissions cap. Companies that do better than the cap can “sell” the unused portion of their caps, for whatever the market will bear, as credits to companies that aren’t meeting their goals. There are stiff financial penalties for non-compliance.
I would prefer to see engineers everywhere act voluntarily to aggressively innovate design-for-environment features in all sites, products and services. But we’re not seeing significant movement in that direction yet, and time to reduce environmental degradation may be running out. So, mandatory cap and trade programs are likely to be among the more successful methods for lowering emissions until we develop technologies to dramatically reduce our use of carbon-emitting fuels.
In contrast, voluntary carbon offset programs are a partially effective, temporary measure toward reducing emissions, mainly because they raise the consciousness of executives, companies and individuals to the measurable costs of polluting.
For example, when we were helping one of our clients to elicit Lean and Green ideas from employees, one of the first responses was that the company should buy carbon offsets. This suggests that electronics executives need to know about voluntary carbon offset credits and develop an opinion on them.
The issue of offsets was brought to my attention by Saxton Rose, the creative director of TFI’s Web site, after he had read my blog on green wash several weeks ago. Voluntary carbon offsets do have the potential to become another form of green wash with more PR benefit to the adopting company than any real impact on the environment. I would not excessively praise companies that adopt voluntary offsets, especially if that is the sum of their green efforts.
If you want to learn more about how to reduce the environmental impact of your company and its products — and increase profits at that same time — then attend our September Quarterly Forum in Ottawa, where we will have a briefing and panel on Zero Waste in the electronics industry. To learn more about this and TFI’s other Lean and Green services follow this link. www.techforecasters.com/consulting/environment/
China’s labor costs for electronics manufacturing are rising even faster than I thought they would. In my work for the Outsourcing Navigator Series, I see dozens of quotations for manufacturing projects each month, and nearly every one includes a China estimate.
Based on this information, I’ve concluded the following:
Before November 2006, China’s labor costs were rising 3% to 5% per year. Then in November that gradual slope in the cost curve took off like a rocket. The result: for all 2006, costs rose nearly 16% with the vast majority of that increase occurring in November and December. In the first three months of 2007, the rate of increase has flattened a bit but has not reversed course. My estimate for 2007: a 10% to 13% increase.
At this rate, China’s labor costs either have or soon will reach parity with Malaysia and Thailand, thus making Vietnam the lowest labor cost location in Asia.
What does all this mean for your sourcing decisions?
More than ever, OEMs need to refrain from making decisions based on fanciful whim about where they think costs are lowest and start getting the facts - and the facts need to be accurate. Plus, they need to start doing their homework on Total Cost of Ownership (TCO) whenever thinking about China, Malaysia, Thailand, Vietnam or even Singapore, because all of these geographies are becoming progressively intertwined from a regional perspective.
Here’s the bottom-line:
Rising labor costs in China will inevitably relieve the competitive pressures that have been holding down prices throughout the region so it is reasonable to say that prices throughout Southeast Asia are going to start going up. When and how much? Who knows? The best course of action may be for North American OEMs to take at look at Mexico, and Western European OEMs to look toward Eastern Europe.
If you need help with TCO or want to know more about what is going on in Asia and the rest of the world, check out my upcoming Outsourcing Navigator workshop next month in Chicago.
Everyone in the electronics industry should pay attention to the homeland security bill wending its way through Congress. It is likely to have an impact on industry attempts to tighten supply chain delivery schedules.
Earlier this year, the House, on a bipartisan vote, passed Bill HR1, “Implementing the 9/11 Commission Recommendations Act of 2007.” The bill awaits Senate action.
Among its provisions, the bill would require that all ocean cargo containers headed to the United States be scanned for nuclear bomb components. At present, a small portion of cargo containers entering U.S. ports are inspected.
If the legislation is passed in its strongest form, with required dates for implementation and penalties for non-compliant trading partners, we could be faced with massive disruptions in global trade.
The good news: The bill gives the Department of Homeland Security up to six years to find, perfect and implement the technology.
There are two screening technologies, neither perfected yet, to be implemented. The first is a radiation scan that detects potentially dangerous cargoes. The second is imaging of the containers’ contents, showing the density (and likely the details) of the load inside.
Chris Koch, CEO of the World Shipping Council, an industry group, tells me his biggest concern is that the current language in the bill is too vague and does not contain enough practical content to guide the ultimate implementation of the required technologies.
WSC is advocating continued development of standards and procedures before any hard and fast decisions are made on implementation deadlines.
We should make our ports more secure, including 100 percent inspection, if it can be done without causing cargo gridlock. But Congress must be careful not to mandate solutions that don’t yet exist.
TFI members need to take an active interest in this issue, because it could significantly slow down our global supply chains. We urge you to keep a close eye on it and talk with your company’s government relations department about these concerns.
We thank TFI member Henri Duhot of DHL for bringing this issue to our attention during our Quarterly Forum in March.
And we’d also like to know what you think about the bill. Please post a comment below.
Technology Forecasters’ recent survey of Lean practices in the electronics industry found that OEMs and EMS companies are the leading adopters. Distributors lag most and component manufacturers fall in between.
Some of us were a bit surprised because we know a few distributors have taken Lean to heart. Arrow Electronics and Avnet, for example, work with their large customers to install in-plant stores and implement just in time (JIT) inventory practices.
Among component makers, many semiconductor companies collaborate with customers, competitors and foundries to speed technological innovation, especially in manufacturing processes, eliminating wasteful duplication of effort. Few chip companies could afford to continue to meet Moore’s Law at each smaller process node if they didn’t collaborate. We might not typically think of these efforts as Lean, but they certainly are in spirit.
Some chip companies are making efforts to improve inventory lead times, which are typically 12 weeks or longer. Last year, Qualcomm, the largest fabless semiconductor company, launched a new approach to inventory management to cut lead times to four weeks or less. It established a die bank, where partially completed wafers from its foundries sit until pulled by Qualcomm’s contract assemblers, who finish the wafers into multi-chip packages with feature sets determined relatively late in the design cycle by cell phone OEMs. This might be the closest chip manufacturing will get to JIT.
The good news: Three-fourths of the 250 respondents from all segments of the industry say their companies are already involved in some kind of Lean practice. Distributors and component makers may lag, but these examples suggest they’re capable of going Lean.
There are likely other Lean examples we should all know about in distribution and component manufacturing. Please comment below and tell us about them.
The next time you calculate the total cost of ownership (TCO) for a program you could source at various sites, remember the curve of your heart beat.Most OEM executives think bathtub curve, not heart beat curve. They estimate high costs at startup and high costs at shutdown, but figure - erroneously - that in between is a flat line. In fact, costs periodically spike through the life of an outsourcing program, creating a curve that resembles a heart beat.
Why does this matter? Because most OEMs do not estimate an accurate TCO for programs they ship to China and other distant cheap labor locales. If they did, they’d be more likely to source those programs closer to home, in Mexico or Eastern Europe.
Any outsourcing program has more costly interventions and initiatives - the spikes in the heart beat curve - than most OEMs think. Based on my research into more than 100 projects, I can say with some certainty that interventions and initiatives will often add up to more than total startup costs, but are overlooked or ignored in sourcing decisions.
An intervention is anything that requires you to send staff to fix: delivery problems, quality problems and engineering problems due to obsolete parts to name just three. Initiatives are those periodic enterprise efforts to improve things, like Six Sigma or ROHS. In electronics, there’s always some new initiative. Yet, these too are rarely considered in TCO.
OEMs need to install accounting procedures that do a better job of tracking the cost of interventions and initiatives so they have a baseline of data from which to make estimates when they calculate comparative TCOs. (For more measurement, take a look at the item on proactive metric management on the Kinaxis Web site.) They could also get some help from our Outsourcing Navigator process.
When it comes to interventions and initiatives, closer is always cheaper. So remember your heart beat — it might save you from having a heart attack over how much you actually spent. Comments, please! And don’t forget to sign up for the June 13th Chicago Outsourcing Navigator Workshop.
I have watched the growth of the electronics industry in Mexico for nearly a decade, and yet I am still surprised by my own findings about Mexico’s improving design capabilities.
The growing appeal of Mexico for electronics design is one of the main conclusions of my recent research, “Mexico’s Near-Shore Design Centers: A Growth Opportunity.” Mexico does not yet offer all of the design capabilities to be found in India or China, but this is often offset by Mexico’s many advantages.
Engineering design services in Mexico are provided at competitive costs, even compared to India and China; proximity to the U.S. enhances time to market; legal protections for IP are comparable to the U.S., and Mexican engineers typically have strong English skills. Mexican universities are graduating nearly 80,000 engineers a year; training is slowly catching up with that of the U.S., Europe or India, but there are promising signs of new collaboration between the universities and many electronics companies.
There are growing design centers in Guadalajara, Jalisco, the state of Chihuahua, and Monterrey, Nuevo Leon. Engineers are undertaking everything from design for manufacturing to software, hardware, PCB layout design and even in some cases chip design—both the hardware and the firmware. In the automotive sector, which is more advanced than others, some Mexican design centers been given ownership of complete designs.
In the past ten years, Mexico has become an important near-shore manufacturing location for OEMs and EMS companies. It is important not to underestimate Mexico as a design location with a lot of potential.
Read our research on this and let us know what you think.
The electronics industry has made important strides in adopting Lean Thinking, but we still have a ways to go to realize its full benefits. I have no doubt that leading adopters are already reaping rewards, but the benefits would increase by orders of magnitude if partners along the entire supply chain adopted Lean.
If you attended our Quarterly Forum last week in Monterrey, Mexico, you saw my presentation on TFI’s research on Lean: “The State of Lean Adoption in the Electronics Industry: Who’s Leading and Lagging the Supply Chain?” Based on our survey of 250 industry executives, the answer is: EMS providers and OEMs lead, while distributors and components manufacturers, including semiconductor companies, lag.
What is less clear, because it was not the subject of the research, is why. Why are larger EMS companies and OEMs the leading adopters? Why do distributors and component makers lag? A collective understanding could be an important step towards progress. I have a few theories, but we’d also like your input.
TFI is deeply committed to Lean and wants to be an advocate for this comprehensive set of philosophies, rules, guidelines, tools and techniques to increase value and eliminate waste in our industry. Our intent is to stimulate interest and discussion, and to help the electronics industry find solutions for pushing Lean to the farthest reaches of the supply chain.
In that spirit, here are three possible theories why distributors and component manufacturers are lagging.
– With the thinnest profit margins, EMS companies are highly motivated for Lean. With some of the highest margins, many component makers have little motivation.
– Lean is typically applied initially to processes on the factory floor. Distribution does not have experience in manufacturing – possibly explaining delayed adoption.
– Perhaps the farther away supply chain partners are from the original demand signal the less likely they are to adopt Lean processes.
In the future, we’ll explore ways to bridge the gap between leaders and laggards. For now, we’re interested in your thoughts on why the leaders lead, and the laggards lag.
After a five-year blitz to outsource as much electronics manufacturing as possible, many OEMs have wrung out all the external costs they can from this model – they’ve harvested most of the low-hanging fruit.
This is my unavoidable conclusion based on more than a hundred research interviews and dozens of engagements with OEMs in recent years in my work to help them find the outsourcing model-location-partner-cost structure that best meets their needs.
If you need any further evidence, consider this: Since early 2006, we’ve seen contract manufacturing (CM) prices rise slightly, especially in low-cost areas like China. Many OEMs reaped a 10 to 12 percent cost savings when they went to China, but those savings are declining. Prices in China are rising 3 to 6 percent in new contracts, based on the many price quotes I’ve seen.
There are, in fact, lower cost geographies now in Asia—Vietnam, Thailand and Malaysia. And I have long believed that Singapore is the best bang for the buck, with a higher quality that offsets any labor cost differences. But for many OEMs, switching geographies could be more costly than staying in place.
What to do next? Future cost reduction will be an inside job.
Until about a year ago, most OEMs didn’t even have a handle on internal costs, mistakenly viewing as one-time costs things like tooling and training, which often become ongoing costs. They rarely factored into their models indirect staffing costs like legal, accounting and IT. They did not have accurate total cost of goods models.
The good news: I’ve seen this begin to change, with many OEMs now sizing up more accurately the internal costs of outsourced manufacturing.
The bad news: OEMs haven’t done enough to curb the internal costs.
To continue to drive their total cost of goods down, OEMs need to take a hard look at what they’re spending internally. Spending dollars internally to save nickels externally is no longer acceptable.
Now that China has passed its first private property law in the Communist era, one might hope that true intellectual property (IP) protection for companies in the electronics supply chain might become a fact of business life.
The landmark legislation, approved late last week, was designed specifically with several constituencies in mind – the growing middle class real estate owners, private auto owners and entrepreneurs whose livelihoods depend on IP protection. But don’t hold your breath waiting for anything like real legal IP protection in China.
There are several reasons IP is likely to remain at risk. First, enacting a law will not change a decades-old mindset regarding individual versus collective rights. Second, the infrastructure for investigating and enforcing IP laws is in its infancy. Third, local judges have a great deal of authority in these cases and it is not clear how they will react.
In short, China is still the Wild West when it comes to IP protection. For more on this topic, see the article I wrote for Electronic Business magazine a year ago. Also see last year’s TFI Q2 Quarterly Forum Report, “Manufacturing Migration.” Things have not changed significantly in a year, and won’t anytime soon just because of this new law.
Consider one data point: Just last month, Susan Schwab, the U.S. trade representative, estimated that 80 percent of the pirated and counterfeited products that are seized at U.S. borders by the customs service come from China.
If an electronics OEM were to decide between China and India strictly on the basis of IP protection, India would be the better bet. India has a long-established English legal system, and is attempting to strengthen enforcement and speed litigation.
Until enough Chinese entrepreneurs have their own IP to protect, don’t expect an all-out effort by Chinese authorities to enforce the laws. IP protection will be for the foreseeable future one of the risks that any electronics company must weigh when deciding if and what to outsource to China.
Tell us what your experience has been in China.
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