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?
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?
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.
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.
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.
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.
About a year ago, Nokia announced plans to build a cell phone plant in Cluj, Romania, and to begin manufacturing later this year. Two months ago, Nokia announced it would close its plant in Bochum, Germany, and shift production to “lower cost regions.” The Germans are outraged, but more about that later.
There’s a good reason Nokia chose Romania. Its labor costs are not as low as China’s, but for European markets Romania is nearly the same as China on a total landed cost basis.
According to research by Technology Forecasters, Inc., Romania has the lowest labor costs of all European Union members. The results are in a Quarterly Forum Report, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” by Charles W. Wade, a TFI senior consultant. It also covers non-EU Russia and Ukraine. The report is available for download by TFI Quarterly Forum members.
According to the report, a skilled Romanian worker made about US$5,000 in 2005, compared to more than US$30,000 a year for a worker in Germany, which has the highest labor costs in the EU. Wade concluded: “In response to our interview question, besides the Ukraine, Romania was noted as the second most desirable location for a low-cost manufacturing operation in Eastern Europe.”
EMS companies in Romania include Celestica, Elcoteq, and Flextronics. Elcoteq has a plant in Arad, near the Hungarian border, acquired from a customer. It makes sub-systems and other components for base stations for that customer.
“You don’t go to Romania because it is so much better than Poland,” says Carsten Barth, Elcoteq director of marketing and communications. “You look at it from a customer’s point of view.” Arad is about 150 miles from Budapest, Hungary, where the sub-systems are assembled into base stations, Barth says.
More OEMs are seriously considering Romania. Thomson S.A. has studied the country as one option for making set-top boxes, says Francois Gauthier, general manager, worldwide operations for premises systems. “The factory I visited had made a product similar to ours in the past and they had experience,” he says. “We also did an audit and were satisfied with their processes.”
Like other nations reviewed in the TFI research report, Romania is a mix of positives and need-to-improves. It is cost competitive, but wages are rising and it has a skilled labor shortage. The government offers a friendly tax environment, but concerns persist over corruption and intellectual property protection. The infrastructure is inconsistent – better in the western part of the country but less solid in the east.
Marius Stefanescu, a dual Romanian and U.S. citizen, who recently returned to set up an electronic manufacturing consulting business in Timisoara, in western Romania, agrees with the general findings of the TFI research. Stefanescu, who spent a decade in the U.S. electronics industry, is candid about the obstacles, but optimistic about overcoming them.
“There’s always a flip side to cheap labor,” he says. “The ghosts of the past don’t want to go away.” Stefanescu, 34, says the Soviet-era worker mentality is “still prevalent among the 40-plus generation.”
He explains: “An engineer would have been paid more and had more respect in the old days, compared to a regular worker, but there was no incentive for professional development. Some older workers are bitter now. They didn’t realize the change had to come from within them.”
As the two newest EU members, Romania and Bulgaria are trying to avoid mistakes made by Poland and others when they joined, Stefanescu says. For example, he says the Romanian government has been more proactive in tackling the corruption found in these countries, including a TV and billboard ad campaign. “There is a huge incentive to get rid of corruption because there’s a lot of investment money in Western Europe waiting for this to happen.”
He cautions the business culture is based on personal relationships more than in the U.S. Several Romanian companies in the electronics supply chain made successful transitions from the Soviet system, but can be hard to locate. “They don’t put much emphasis on email or the Web,” Stefanescu says. “It is more about knowing someone or knowing someone who knows someone.”
In the end, the biggest problem with moving to Romania, especially if relocating from Western Europe, could be bad headlines like Nokia is getting. Branding Nokia’s move “caravan capitalism,” German union and government leaders have called for a nationwide boycott of Nokia products and for the EU to ban Nokia’s deal with Romania.
Says Stefanescu: “In my opinion, that can only delay but not kill the initiative. Nokia has already invested too much and, what’s more, developing rural Romania is also a clear interest of the EU.”
From time to time, we hear some version of the following story. Maybe you do, too.
With the best corporate social responsibility (CSR) intentions, an OEM tells its Chinese contract manufacturer to limit workers’ overtime to the amount prescribed under law. Then many of the workers quit and go to another manufacturer that doesn’t follow the law.
Electronics manufacturers and others face the dilemma of breaking the law to offer as much overtime as possible to workers, or complying and losing workers to employers who don’t play by the rule. Chinese labor law stipulates that workers cannot work more than 36 hours of overtime in a month, but does not enforce the rule, and workers want as much overtime as they can get.
We hear the stories, but rarely see any documentation of the problem. So shame on us for not noticing sooner: A study group from the Foreign Investment Advisory Service of the World Bank and Business for Social Responsibility, with financial support from various organizations, including the Electronics Industry Code of Conduct group, recently researched CSR, including the overtime problem, in Shenzhen’s electronics sector and published its finding last summer.
Entitled “Corporate Social Responsibility in China’s Information and Communications Technology (ICT) Sector,” the report examines CSR issues based on interviews with several EMS companies, including Celestica, Flextronics and Foxconn, and several OEMs, including Hewlett Packard, Motorola, Nokia, and Philips.
Here’s a sample of its findings, from section 2.2.7, “Complexity of the overtime issue:”
“Since employee retention is a major challenge in Shenzhen, factories are extremely concerned with losing workers due to insufficient overtime. Among the suppliers interviewed, turnover ranged from 3% to 20% per month. Many suppliers felt that workers demanded at least 60-80 hours of overtime per month, and that overtime only became unwelcome above 100 hours per month.”
No single electronics company can begin to resolve the gap between law and reality. The existing law may be too restrictive, but there is likely an appropriate level of overtime that all parties—the industry, the Chinese government, and the workers – could agree to if they were to negotiate, which the study group recommends.
CSR is important to electronics companies, so it is time for all parties to get together and iron out a resolution, one the Chinese government will enforce. The report recommends stiff fines for companies that break the law and incentives for those that abide by it.
What’s your experience with the Chinese overtime dilemma?
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