Technology Forecasters, Inc.
Strategic Environmental and Manufacturing Consulting
When Flextronics International and Solectron announced their merger in June, many of us wondered whether this signaled a new round of consolidation and restructuring for contract manufacturers. It would appear that it does: Restructuring through internal downsizing is already taking place.
In a presentation at Technology Forecasters Inc.’s Quarterly Forum last week, Louis Miscioscia, managing director of Cowan and Co., an equity research firm, offered evidence that CM plants outside Asia generate less revenue per square foot than those in Asia. He estimates geographies outside Asia are getting $500 annually per square foot of manufacturing space; most Asian locations, at fuller capacity, are getting as much as $1,000 per square foot annually.
“This would suggest that there is still too much square foot capacity and it needs to come down more,” Miscioscia said in an email exchange with me.
He says how much restructuring is underway is less clear: “It is hard to tell since we only get square foot on an annual basis and almost every EMS company is restructuring now.”
He offered several estimates for the year to date: Celestica has closed 306,000 square feet in Europe; Jabil Circuits, 656,000 square feet in Europe; Sanmina-SCI, 260,000 square feet in Europe, and Solectron, 400,000 square feet in North America.
Flextronics and Solectron hope to complete their merger by the end of the year, and Flextronics has estimated the combined companies will cut costs by $200 million within two years. That certainly involves some restructuring of plant space.
Miscioscia pointed out that restructuring can lead to disruptive costs and excess inventory issues while management focuses on downsizing costs rather than winning new business or improving operations.
We’d like to hear from OEMs and from EMS companies on this. Let us know your thoughts.
We can expect reasonable growth over the next five years in the market for aerospace, defense, and homeland security electronics, according to new research from Technology Forecasters Inc.
“Electronics in Aerospace, Defense and Homeland Security: Repositioning for the Future,” a Quarterly Forum Report released this week, also concludes that significant opportunities exist for suppliers to serve customers in these segments as they increase their reliance on outsourcing.
TFI estimates the total available market for this sector will grow from $112 billion in 2006 to $152 billion by 2011, a 6.3 percent compound annual growth rate (CAGR). EMS revenue from the sector will increase at a 9.3 percent CAGR, from $2.8 billion in 2006 to $4.4 billion in 2011. EMS penetration will remain relatively low in the 3 percent range.
The research conclusions are based on in-depth telephone interviews and an online survey directed at management and senior technical personnel. We also conducted secondary research in the appropriate markets.
In choosing OEMs, these customers focus primarily on quality, dependable delivery, a competitive price, technical capability, and adherence to regulatory standards. Flexibility, responsiveness, and customer service also are critical issues for customers.
The aerospace/defense electronics industry is attractive to suppliers because of growth potential and portfolio diversification. However, the report flags several cautions:
-Contractual requirements can prove to be challenging.
-Demonstrated experience in the government and aerospace contracting arena are critical for selection as a partner.
-Government contracting moves at a much slower pace than the commercial world. Up-front investment may take years to recover. Project cancellations can occur.
-Margin pressure in aerospace/defense business is not as critical as the commercial world, but cost management is still an issue.
How do these match your company’s experience in aerospace, defense and homeland security? We’d like to hear from you.
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?
I like to play chess. I’m not great at it, but pretty good. I don’t have the time to invest in playing with people, so I decided to get some chess software. Anyway, people can be so annoying.
While looking at different programs, I discovered some freeware I could load on my Blackberry. That’s convenient for a busy guy like me; I can squeeze in games when traveling, watching paint dry, waiting for the light to change, etc. Nice.
The program’s okay — great graphics, easy to use, small footprint, plays at multiple skill levels (the highest one is even tough for me to beat), and it never makes a mistake — something that’s really annoying when playing with people. There’s no fun in winning if the other guy loses due to a mistake.
After playing a few hundred games, I figured out a few “weaknesses.” Not bugs or errors — just weaknesses, or limitations, things that if “I got into trouble” during the game I could exploit (i.e. use to cheat) to beat the software.
Being that I lack the self-control to not cheat, and I like the portability of the chess game on my BB, I decided to find a dedicated-handheld chess unit. There are several nice ones on the market; however, the ones with features comparable to my freeware are expensive.
What the heck. I decided to spend the money and get something that would be totally up to my game, and that I wouldn’t get dissatisfied with.
So I spent a ton of money (drove my TCO through the roof) only to discover that after playing a few hundred games I figured out some “weaknesses” in the unit (not bugs or errors – just limitations) that were different from the ones in the freeware but similar.
Now I’m angry and asking myself: “What the heck does it take to get a ’solution’ that I can carry in my pocket, that’s rugged, has long battery life, has full featured graphics, and consistently plays chess at my current (and future) level without any limitation?”
Is that asking too much? Are my expectations out of line?
Having paid nothing for the freeware, I also feel like I got “ripped-off” by the expensive product. Why should I have to pay for “embedded software” in the device? Based on my estimate of COGS for the hardware it should have been much cheaper!
I think I should get my money back, and be compensated (maybe handsomely) for my trouble. Plus, I think I’m due an apology from the freeware company for all the inconvenience they’ve caused me. People can be so annoying.
There’s a blog worth reading at Kinaxis.com regarding the importance of supply network collaboration. Kinaxis, a strategic partner of Technology Forecasters, knows what it is talking about on supply chain matters - so we pay attention.
The Kinaxis blog of July 18 points out that supply chain collaboration used to mean your systems talked to each other. As important as that still is, people need to talk, too. Real collaboration is among human beings, it argues.
An OEM or contract manufacturer can throw all the collaborative technology it wants at a supply chain, but if people aren’t willing to work together, then collaboration won’t happen.
We agree with Kinaxis, and we want to advance the discussion.
Supply network collaboration is important, but many are having trouble getting there. Not so much in adopting technologies, but in making effective use of them. That’s because for a variety of reasons, corporate culture in North America historically has been collaboration unfriendly, throwing up a number of roadblocks.
David Coleman, founder and managing director of Collaborative Strategies LLC, San Francisco, has studied and evangelized collaborative technologies and collaborative culture for 15 years. His Web site is a fountain of useful information.
Take a look at his report, “Critical Factors for Adoption of Collaborative Technologies.” Especially see Page 2, where he outlines critical success factors.
Among his points: Successful corporate collaboration requires a high level champion to drive it forward; it must be connected to an important business need; there need to be measurable outcomes; business processes need to be well defined, etc. These certainly apply to supply chain collaboration.
We’re interested in hearing from TFI members about what they find to be critical success factors - and obstacles - to supply network collaboration. Let us hear from you.
Every benchmark study of the EMS and ODM industries that Technology Forecasters has conducted in recent years reaches the same conclusion: The ODM sector generally outperforms the EMS sector.
This year’s study is no different — even when we reclassify all HonHai’s ODM business as an EMS play.
This raises the obvious question: Why?
The short answer: Because there are fundamental structural, operational and cultural differences between the two sectors.
Most ODMs are Taiwanese, and started in the ODM business - creating their own IP for end products - and only recently have tried to move into the EMS model.
Most EMS companies are North American or European and started in contract manufacturing, where the Golden Rule is, “Thou shalt not compete with thine customer.”
When EMS companies develop products like an ODM would, OEMs see a conflict of interest. The same OEMs do not see conflict of interest when they sign up the ODMs.
Is it possible for EMS providers to morph into ODMs? Some have tried, but it’s doubtful that this will work in the long run.
For one thing, ODMs tend to have more tightly integrated relationships with suppliers than EMS companies. ODMs often have minority or majority stakes in their suppliers. Hon Hai is an extreme example of this, but the others have tight relationships, too.
To boost their margins, EMS players may be better off focusing on offerings in services like design support, logistics and repair, and staying away from the IP business. In these areas, they have an advantage over the ODMs.
Many ODMs have not found the EMS model easy to adopt. BenQ, for example, has struggled since acquiring Siemen’s cell phone factory in Germany two years ago.
ODMs face their own challenges in becoming more like EMS companies, and vice versa.
What are your thoughts?
A new bit of alphabet soup has crept into the electronics manufacturing lexicon. “JDM” - Joint Design Manufacturers - an alternative that more OEMs have begun to consider when reviewing their outsourcing options.
Who exactly are these JDMs and what exactly do they do?
The concept has been around for quite some time, especially in government work. You’ll find many examples of JDM - though not under that name - in the maze of military and aerospace contracting, subcontracting and sub-subcontracting. But this particular bit of alphabet soup has only recently begun to be used in the commercial electronics sector.
Briefly, as I explained in a presentation at the recent Quarterly Forum, the JDM typically does some portion of the design and then manufactures the product. This allows the OEM to focus design resources on the more consequential IP in the product, while the JDM handles the routine design elements and supports the manufacturing ramp-to-volume.
We don’t know of many “pure play” JDMs, but rather see larger tier EMS companies, design service bureaus and others - even some OEMs to other OEMs - providing these services under various names - JDM, CDM (concurrent design manufacturing), DMS (design and manufacturing services), and no doubt other monikers we’re not aware of yet.
There’s scant market data on this approach. Aside from the military and aerospace, we think most of the JDM work is being done in communications, computer and consumer segments, perhaps as a consequence of the design resources divested by OEMs in these market sectors in the past decade.
We estimate JDM services account for less than 1.5 percent of annual EMS revenues, which puts it south of the $1.5 billion mark.
There is likely much more to learn about the JDM play, and we would like to know TFI member experiences. Let us hear about what insights you have gained in this space so we can all gain a better sense of this emerging trend.
Any EMS company looking for fertile new ground ought to dig into TFI’s recently released Quarterly Forum Report on medical electronics. “Medical Electronics: At the Crossroads of Patient Care and Technology” is as thorough a look at the growth opportunities as any you will find.
The researchers, TFI senior consultant Charles W. Wade and his wife, Jo Wade, an assistant professor at the University of Tennessee, expect the medical electronics market to grow at an 8 percent CAGR between 2005 and 2010. They conclude that medical electronics outsourcing will increase from a current penetration rate of 11 percent to 14 percent by 2010. Cost reduction, flexibility and reduced cycle time are driving medical OEMs to find outsourcing partners.
The study’s findings show that many second and third tier EMS companies are doing well with medical electronics. This bolsters earlier TFI research that suggests medical electronics is an important area for medium sized and smaller EMS companies.
(See, “Where Did EMS Business Come from in 2005, and Where Might It Come from in 2006?,” a Quarterly Forum Report for second quarter 2006.)
That’s because medical OEMs have unique needs in areas that require the kind of TLC smaller EMS companies have proven capable of providing: high mix/low volume manufacturing, quality processes, understanding regulatory systems and agency approvals, sensitivity to IP protection, reporting and tracking systems.
To date, medical electronics is not rushing off as quickly to low cost geographies, since the major markets tend to be in North America, Western Europe and Japan. Medical OEMs seem to prefer closer-to-home manufacturing partners, but this is not expected to last forever. Hon Hai Precision Instruments recently announced it is thinking about getting into medical electronics.
American and European EMS executives would be wise to plant their stake, or drive it deeper in this fertile dirt sooner rather than later. Write and tell us your experience with medical electronics if you are already in that sector.
At times, OEMs and contract manufacturers appear to be obsessed with China, but Eastern Europe gets stronger by the year and should not be overlooked as a an outsource manufacturing locale.
A recent report from Electronic Business on the growing electronics industry in Romania - especially analog chip design and contract manufacturing - got some of us to thinking once again about Eastern Europe as a good place for outsourcing. Worth taking seven minutes to read it.
I asked Charlie Barnhart, the TFI consultant who designs and conducts the Outsourcing Navigator Workshop, what he thinks about Eastern Europe in 2007. “Eastern Europe is much stronger today than in the past-say five years ago,” Charlie tells me.
The last time TFI took a close look at Eastern Europe - about 18 months ago for our Munich Quarterly Forum - it was Charlie who made the presentation. He continues to pay close attention and he knows what he’s talking about.
Straight manufacturing costs in Eastern Europe run 8 to 12 percent higher than in China, but they net out at 3 to 5 percent when the total cost of ownership (TCO) is calculated, he says. The lower risk factors in Eastern Europe almost make it a wash.
Charlie especially likes Hungary, is neutral on the Czech Republic, and suggests avoiding Russia and the Ukraine. He says the best run operations are managed by Western Europe ex-patriots. And he advises that the longer the country has been in the European Union, the better bet it is for manufacturing.
Electronic Business makes a sound case for a recent new member of the EU - Romania — noting that several major EMS companies and OEMs are manufacturing there, including Solectron, Celestica and Nokia.
All in all, Eastern Europe is a place worth considering, especially if the end markets are in Europe, Middle East and Africa.
What are your thoughts? Any experience in Eastern Europe there? Tell us about them by posting below.
While we have your attention, be sure to check out the June 11 blog at Kinaxis on how to reduce supply chain costs — useful reading.
Idle thoughts at 30,000 feet …
On the airplane returning from my most recent Outsourcing Navigator workshop, I was wondering: Has anyone ever looked at electronics industry outsourcing from a macro perspective?
I always preach the importance of total cost of ownership in outsourcing decisions, but that is not what I mean. I mean, has anyone ever tried to add up the total amount the industry has spent on its never-ending, search-and-deploy mission to the next lower labor cost region?
Prof. Hau Lee, a supply chain expert at Stanford University, tells us he’s never heard of any such studies. If anyone would know, he probably would. Someone should study the matter.
In what has at times resembled a progressive disease, we have run around the world chasing low cost labor for decades. Prices go up, and we run to the next low cost labor.
We do crazy stuff in pursuit of this goal. We spend breathtaking amounts to set up plants, train people, and establish supply chains. There is no doubt some benefit to the local economy when we do this.
But then we shutter the plants, abandon the sites, and move on when we think we can save a buck an hour on labor. To do this, there’s an incredible cost of capital in relocating our fixed capacity around the world.
Then there are the related transportation costs. We fly stuff all over the world. Before I owned it, the parts in my cell phone, including the final assembled product, probably had more mileage than I have frequent flier miles.
So I ask again, has anyone ever calculated the cost of moving this industry progressively around the world all these years? Would that total cost have erased whatever labor advantages we got by moving to China, for example?
Implicit in my question is the possibility that it doesn’t make sense. But, I’ve never encountered a fact-based argument one way or the other.
Have you ever wondered? Let us know, and give us your opinion by posting a comment below.
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