Technology Forecasters, Inc.
Global Consulting and Research for Outsourcing and the Environment
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?
Even the best medical doctors consult other experts. Shouldn’t electronics OEMs that spend millions of dollars on outsourcing do likewise? The following illustrates some of the risks of the insular approach.
I recently conducted a review for a large medical electronics OEM on their request-for-quotation (RFQ) and the resultant pricing they received.
The outsourcing job was a product (about the size of a breadbox) that had been re-designed and reduced in cost. As medical gear goes the anticipated volumes were relatively high, so it made for an attractive piece of business for any EMS or ODM seeking new medical business.
Nine companies bid. Based on my recent update to the Outsourcing Navigator I knew prices were rising but was still surprised by the quotes. The three suppliers who would talk to me (one of which was the OEM’s preferred source) had quoted almost twice as much for value-added services than I would have anticipated.
When asked about this they admitted padding their numbers by more than 5 percent (I made it more like 8 percent to 12 percent) as they felt the geography requested was the wrong solution and would result in problems. What a concept though: An EMS company actually priced a job to make some money!
Despite the fact that everyone talks about collaboration these days, none of the suppliers had offered an alternate suggestions to the OEM. When asked why they hadn’t, they all informed me it was “crystal clear” (from comments made by the OEM’s sourcing team) that the solution had already been decided and that the OEM’s main criterion was a contractor that would “keep its mouth shut and do what it was told.”
When I shared this information with the OEM manager working with me on the case study, he was furious and stopped the analysis –he didn’t even ask what was wrong with the geography they’d selected or what a better alternative might have been. Go figure.
The outsourcing landscape looks a lot different than it did last year, much less compared to three, four or five-years ago, and the rate of change accelerates. Given this reality, seeking alternative ideas and approaches is no longer a luxury – do yourself a favor and get a second opinion.
Based on nearly thirty recent, on-site interviews and extensive phone research of electronics contract maufactuers, this exclusive Webcast provides an in-depth picture of the current state of outsourcing in Eastern Europe, trends for future growth, details on a set of Central and Eastern European countries, plus recommendations for OEMs and contract manufacturers.
Outsourcing Trends in Central and Eastern Europe: The Second Wave: Play Now | Play in Popup | DownloadThe Joint Design Manufacturing (JDM) model could be a key for EMS companies seeking business in aerospace, defense and homeland security, according to Jeff Kaylor, director of government services for Sparton Corp., Jackson, Mich., a mid-tier EMS company with manufacturing facilities in North America and Vietnam.
In an interview with Charlie Barnhart, a Technology Forecasters Senior Consultant, Kaylor shares this and other tips on how to gain traction in aerospace, defense and homeland security. Sparton has engaged in defense contracting and subcontracting since 1914, and electronics manufacturing for nearly two decades. The 15 minute interview is available on a podcast.
In the JDM model, an EMS company or ODM typically does some portion of the design and then manufactures the product. This allows the OEM (primary contractor in defense lingo) to focus design resources on the more consequential IP in the product, while the JDM partner handles the routine design elements and supports the manufacturing ramp-to-volume.
Kaylor says the model is gaining popularity in defense contracting, which has undergone a substantial amount of consolidation in recent years, leaving what he calls “gaps” in the design chain — an opportunity for JDM services offered by companies like Sparton.
As TFI found in research conducted last year, aerospace, defense and homeland security are increasingly moving to outsourced manufacturing. While this sector’s migration to outsourcing will continue to be gradual, it represents new opportunity for EMS companies flexible enough to meet the sector’s demands.
And design is definitely something the sector is looking for, Kaylor says. For other insights from Sparton’s experience, be sure to check out the podcast, and let us know what you think by writing a post here.
With the dollar weaker than it has been in years, is there any reason to consider Central and Eastern Europe for outsourced electronics manufacturing?
There is: Although each outsourcing decision ought to be made on its own merits, the low-cost nations that once comprised the Soviet Union and its satellites should be considered, especially when the end market is Europe, the way Mexico ought to be considered when the end market is North America.
“Discussion of China versus Eastern Europe seems anachronistic to me,” Charlie Wade, a senior consultant at Technology Forecasters, told the recent TFI Quarterly Forum in San Jose. “The better point of comparison is Mexico to Eastern Europe.”
Wade, who conducted TFI’s recent research, “Outsourcing Trends in Central and Eastern Europe: The Second Wave,” presented the highlights at the Quarterly Forum.
Wade talked to 14 electronics industry executives in nine nations during a tour in October. Another 17 phone interviews with electronics executives rounded out the primary research, which builds on TFI’s earlier research in Europe.
Like any region, Eastern Europe has its issues. Among them: Cost competitiveness, supply of skilled labor, corruption and protection of intellectual property, local management skills, language differences, and the regional infrastructure.
Nonetheless, Wade concludes in the report: “After analyzing the many factors that define each European country’s competitiveness, it becomes apparent that Central and Eastern Europe together with the Baltic States are positioned to become the manufacturing center for the continent, serving the business and consumer markets for all of Europe.”
He says the region is “poised for growth” citing such features as direct labor and facility cost lower than Western Europe, locations central to the European consumer market, a growing consumer population itself, appeal to foreign investment, government support, modification of local laws, and improving infrastructure.
For his specific recommendations for EMS companies, ODMs and OEMs, be sure to read the report. (TFI’s Outsourcing Navigator can help you make sourcing decisions.)
As always, we’re interested in your reactions.
Has your company made any New Year’s resolutions yet? If you need some ideas, try one of these offered by Technology Forecasters consultants. Or share your own with us.
Think Lean: In 2008, wherever your company is in its adoption of Lean principles, extend them. If one manufacturing site is already Lean, take Lean to other sites. If all plants are Lean; bring Lean to non-manufacturing operations. If you’re 100 percent Lean, globally and every other way, start applying Lean to your supply chain—pick a key supplier or three and Lean the processes among yourselves.
Go Green: Keeping in mind that Green (the environment) is Green (profitable, competitive, etc.), take stock of your State of Green, and establish a five-year roadmap for eliminating waste and becoming more environmentally efficient, including at least three Green goals to accomplish this year. (We’ll have more to say about environmental roadmaps in the months ahead.)
TCO: This one’s especially for OEMs. Location is everything in real estate, but not in electronics manufacturing. Total cost of outsourcing (TCO) is. With the dollar weak and the price of oil high, TCO is a moving target. Resolve to consider each individual outsourcing decision on its own merit, based on TCO. (Need help with TCO? See TFI’s Outsourcing Navigator).
Rising markets: This one’s for EMS companies. Resolve to investigate at least one new market where outsourcing penetration is still relatively low — medical, defense, industrial, instrumentation, etc.
Outreach: Reach out once a week to a customer, supplier or supply chain expert. This regular effort may help with your own supply chain challenges, create an opportunity to help a partner resolve a challenge and build a diverse pipeline of inputs for a stronger supply chain.
If you’ve got your own resolutions, we’d like to hear from you.
Statistics don’t lie, but conventional thinking might lead to the wrong conclusions about customer ratings. You tell us.
At its Quarterly Forum in San Jose, California, last week, Technology Forecasters reported the results of the 2007 edition of its “EMS, ODM and Distributor Report Card: Customer Satisfaction Survey.” On five criteria OEMs gave their EMS and ODM partners mostly boring grades – a lot of C’s and C+’s, few A’s and no F’s. The results are consistent with OEM ratings from previous TFI studies.
And, perhaps adding insult to injury, most OEMs did not consider their primary EMS or ODM partner to be “best in class,” except on one of the criteria graded —responsiveness to change.
What shall we make of this?
The results caused a rousing discussion among TFI members at the Forum. One conclusion: OEMs are loath to give their supply chain partners anything higher than average marks because they want to keep the pressure on them to deliver better, faster, and cheaper. Some OEMs represented at the Forum agreed this could be the case.
The grades also prompted an interesting reaction from the EMS folks at the Forum: If an EMS company is getting all A’s, maybe it ought to be paid more by the customer. Think about it. If the EMS is getting C’s, then maybe the effort and expense it is expending is just right. Forget about “delighting the customer” when margins are razor thin. There’s some kind of weird logic to that.
We’re interesting in your comments. Be sure to identify whether you’re from the OEM or EMS side of the equation. Are C’s and C+’s the sweet spot from everyone’s perspective?
For the first time since I started measuring more than five years ago, and most likely for the first time ever, the labor cost for assembling printed circuit boards (PCBs) is lower in the U.S. than in Canada.
No, you did not misread that statement. By my recent calculations, the average U.S. cost for fully burdened direct labor for PCB assembly is $39.10 per hour. The comparable figure in Canada is $45.80 - 17 percent higher.
The weakened U.S. dollar has turned upside down many assumptions we’ve been using to calculate total cost of ownership (TCO) in electronic manufacturing sourcing decisions. Everyone - OEMs and contract manufacturers - has something to lose.
Canada is not a huge outsourcing destination for OEMs, but it has been a regular North American manufacturing site because it was less expensive than the Lower Forty-Eight. The strength of the Canadian dollar changes that.
The Euro is about 50 percent stronger against the dollar than it was when many current outsourcing contracts were written for European sites. China and the rest of Asia are also seeing some, though less, impact from the falling U.S. dollar.
If your company’s CFO doesn’t have a corporate currency risk mitigation strategy, then shame on him or her. Contingencies for currency fluctuations are not typically written into outsourcing contracts.
U.S. OEMs and their CMs usually set contracts in U.S. dollars; if the dollar weakens someone takes a hit. Right now, that someone is the CM that must pay a labor force in Euros or Canadian dollars.
OEMs now negotiating contracts for future sourcing can expect U.S. dollar costs to rise accordingly, especially if they’re determined to outsource to Canada or any country using the Euro, or that has a local currency closely tied to the Euro, as many Eastern European countries do. (Most of them intend to move to the Euro but not for a couple of years yet.)
As ever, TFI’s Outsourcing Navigator can help you sort this out; in December I’ll issue a revised version that takes the weakened dollar and other changes into account.
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