Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
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.
At our Quarterly Forum in December, a speaker on corporate social responsibility (CSR) was asked about the rapes of female workers at electronics contract manufacturers in Mexico while they traveled home after the late shift.
Without hesitating, the speaker said her company, a major OEM, was talking with its Mexican suppliers about several measures, including providing the women with safe transportation or escorts, providing them with training, and talking to the police about prosecuting the perpetrators.
Should the question have been asked? Of course it should have.
Some participants later criticized the questioner for bringing up an uncomfortable topic. We reassured him that TFI will not shy away from uncomfortable issues when they are real and when our members — executives at OEMs, CMs, and supplier companies — are the right people to find solutions.
Because electronics manufacturing outsourcing is now ubiquitous around the globe, everyone from OEMs to CMs to suppliers can expect to come under the scrutiny of government regulators and non-government watchdogs. In many cases, the watchdogs will be there first and will be tougher. The business risks have become too high for our members or any industry executive to be shy about raising questions about ethical practices whose infractions could cost net-profit points and customer loyalty.
As we get ready to head south to Monterrey, Mexico, for the next Quarterly Forum (March 28-29), we want to encourage members to ask tough questions– even uncomfortable ones—about the ethics of even common business practices in our industry. What better place to hash them out, educate ourselves and find collaborative solutions?
John VanNewkirk, CEO of CheckSum, which develops circuit test technology, thinks he knows why so many CMs are clutching razor thin margins.
They’ve forgotten what business they’re in.
VanNewkirk had this epiphany during a recent visit to a customer, FoxConn in China. He was stunned that the test manager’s office had two saw horses and a piece of plywood where there would normally be a desk. He’s never seen anything this low-cost.
“Cheap furniture doesn’t cost much, but they didn’t even have that,” VanNewkirk, a member of the TFI Quarterly Forum, tell us. “Cost savings is deep in their culture.”
He reasons, and we tend to agree, that a CM this conscious about saving money on office furniture is bound to apply the same rigor to cost cutting in every manufacturing process.
VanNewkirk continues: “oxConn understands they are selling a commodity, if you look at the way they operate. They’re probably paying about the same labor costs as others [in China]. But they had concrete floors and saw horses and plywood for desks.”
In their haste to rush into design and other value-added services, top tier CMs have lost sight of their main line of work, and aren’t doing enough to squeeze every penny of cost from their processes, VanNewkirk believes. Within his own area of expertise - test - he sees little effort by most large CMs to reduce waste and cost.
Consequently, he adds, they wring their hands over why they’re reaping 4 percent margins or worse. “Companies that are best at being commodity players want to eliminate waste in every step in the process,” he says.
He doesn’t advocate - nor do we - that a large CM shouldn’t offer design services. If Safeway, the grocery chain, wants to have a deli section that’s fine, but it better not forget its main business is stocking food on the shelves at the lowest possible prices, he says.
Most CM plants and offices we visit are quite Spartan, though we don’t recall seeing saw-horse-and-plywood desks. That said, we believe VanNewkirk has a point. It’s not that CMs shouldn’t add services, they just need to remember what their main business is, and do it more efficiently.
Who do you think? Please share your thoughts.
Technology Forecasters has previously identified the cost and availability of electronic parts as one downside to manufacturing in India. But recently, we’ve seen reasons to offer a bit of hope that the component supply chain in India might be improving.
In research conducted by our senior consultant, Matt Chanoff, last year for our Fourth Quarterly Forum, “The EMS Industry in India: Opportunities and Challenges,” the cost and availability of parts stuck out like a sore thumb as a problem for manufacturers in India, especially in the in-depth interviews TFI conducted with manufacturing executives for that report.
We are heartened, however, that the Indian government recently announced its Special Incentive Package Scheme, an initiative focused on attracting investments for setting up semiconductor plants and other technology manufacturing industries. Full details are to be announced in about two weeks, but in general there will be significant financial inducements, including tax breaks, for chip companies that set up manufacturing in India. We believe where the semiconductor industry goes the supply chain will follow.
In a recent email exchange with an industry executive who is plugged in to the design and distribution business in India, and who read about our research, told me that his company has noticed an increase in the number of sample requests coming from the growing design engineering services sector in India. This executive took this as evidence that component makers might follow. He will share some trend data with me next week that I’ll add to this blog.
TFI’s research showed a sharp contrast between the challenges companies expect to meet when they go to India and the issues that companies with experience in India point to as really most challenging. Prospective market entrants worried about the skill levels available in India, maintaining product quality, and dealing with an inadequate communications infrastructure. They were less worried about the cost or availability of components and other materials, or about transportation costs. In contrast, experienced companies cited the component supply base, ground transportation, and the regulatory environment as their biggest headaches. They were much less challenged by skill levels, product quality, or communications.
Although the figure 300,000,000 is often cited as the number of middle class Indians, this actually includes all households above absolute poverty. From the point of view of electronics companies looking for a market, there are approximately 19 million households or 90 million families with sufficient wealth to consider purchasing electronics. Challenges identified by our research include lack of component supply base, poor physical infrastructure, particularly roadways, and regulatory issues.
If you’ve never worked in outsourcing, take it from me – outsourcing is hard work.
It doesn’t matter if you work for the buyer or seller, or a supplier of parts or services - outsourcing is hard work. And in my humble opinion the people who make their living doing the work of outsourcing are some of the most dedicated yet least appreciated people in the electronics industry.
Why underappreciated?
Perhaps it’s because the people who practice the craft of outsourcing have never shared with their co-workers just how complicated and problematic the process they manage can be – probably because they were too busy trying to expedite product deliveries while simultaneously mitigating excess materials from the third product forecast change of the month. A forecast they already know will be obsolete before they show up for work tomorrow morning. Yet they push forward.
Or maybe it’s because we’ve become an industry of Product Development and Marketing elitists. Ever hear a CEO telling a securities analyst how they were going to build the next great commercial enterprise by never actually building the products they sell – I have.
Guess what… the CEO’s dream is only possible because there are hundreds if not hundreds of thousands of very hard working people out there building the products that the CEO thinks they’ll never touch. People both inside and outside the enterprise with the chutzpa to do the heavy lifting and fight the endless battles, people whose experience is measured by scars not patina, people who make it happen – everyday – not because someone tells them how much they’re appreciated but in spite of the fact that they’re ignored.
So if you’re in the craft and making it all work – thank you and rock-on!
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