By Pamela Wiseman, TFI Senior Operations and Supply Chain Consultant
Manufacturing out- and in-sourcing strategies are controversial and lively topics these days. Even people not directly involved in manufacturing discuss these themes in daily conversation, prompted in part by the media being quick to ensure that we all know that Whirlpool will move a portion of its manufacturing from Indiana to Mexico, and that Nokia , NCR, and LeCroy have all decided to reverse their outsourcing trends to bring some manufacturing back in house. The economic downturn has been a catalyst for change and adaptation, prompting executives to reassess and reposition manufacturing strategies.
A Google search for “Nokia outsourcing” yields a 5-year chronology of the company’s decisions. As the market forces ebb and flow, Nokia’s decisions have appeared to be frequent and seemingly fluid and reversible. This flexibility in manufacturing strategy has great value in volatile market environments, where demand — as well as energy and transportation costs — can fluctuate dramatically. Carbon footprint and protectionism are also becoming valid concerns when devising a manufacturing strategy. Both traditional and new variables must be considered, all of which seem to be more difficult to forecast than ever before.
The uncertainty in global economics and politics amplifies the fact that decisions made based on today’s lower demand for production volumes, current energy costs, and other influences will certainly need to be revisited — probably sooner than expected. The more flexible the manufacturing model, the more rapidly a company can respond to changing business dynamics. As global demand recovers it will be key to reassess our manufacturing strategies to build in more flexibility than ever.
Nokia appears to have skillfully devised a hybrid manufacturing strategy and capability that balances outsourcing with in-house manufacturing. Today’s volatile demand is presently associated with the downturn, but — in fact — this demand pattern is also true of products during a typical lifecycle. The hybrid model provides resiliency and options when business forces are changing.
Executives with the capability to outsource when economics are favorable while maintaining in-house proficiency are positioned to optimally respond to the varying cycles. This strategy also protects against the loss of leverage and skills resulting when giving up in-house manufacturing capability. Ultimately, executives will assess the changing forces and align capability to best meet customer demand.
Many questions remain (consider replying below). Do you think this degree of flexibility is practical, in light of possible trade offs for quality, supply chain, logistics? What additional costs come along with flexibility, and will they be offset by the value of potential market responsiveness? Has your company rapidly relocated manufacturing capability with minimal repercussions?
There is no understating the importance of a CEO’s vision to a company’s policy decisions and corporate culture. The choice about where to locate manufacturing, for example, has been driven by many a CEO. In the past decade, Wall Street analysts’ belief that manufacturing in China was the ticket to increasing shareholder value (regardless of product types or customer locations) propelled countless CEOs to declare that their companies, too, would manufacture products in China — often to the surprise of their Chief Operating Officers.
This week I had the pleasure of meeting a CEO whose vision is driving him to move manufacturing from Southeast Asia to Midwest USA. But this was no shock to his COO (sitting with us at the coffee house), because this company — Vista International — is founded on CEO Johan Smith’s bold vision to power a cleaner world and to “Reducing carbon footprint one step at a time” (trademarked). Vista, headquartered near Denver, Colorado, is a technology holding company in the renewable energy industry. During the past 20 years the company has acquired technologies as diverse as energy-efficient lighting for facilities, converting waste to high-octane fuels, high-efficiency wind and hydro turbines, and higher-BTU coal with less pollutants.
Though Smith has lived and worked in several countries and has advised government officials in China, Mexico, St. Lucia (Caribbean), Bulgaria, and Israel, he wants to build the company’s largest-yet production facility in the Midwest USA, serving both domestic and international customers. He mentioned tactfully that he is not entirely comfortable with manufacturing in China. It’s likely also that the energy-efficiency investment portion of the American Recovery and Reinvestment Act of 2009 strengthens his decision.
The return to regional manufacturing — making products close to customers — is a strategy TFI has been recommending to clients brave enough to counter a trend. The benefits include meeting regional customers’ requirements more quickly and precisely, mitigating risk compounded across multiple national borders, and reducing carbon footprint — the latter being more visible these days to investors and corporate customers. The CEO must share this vision because an operational shift this far-reaching is rarely championed by a singular manager outside the executive suite.
The electronics contract manufacturing industry is full of CEO visionaries who dictated manufacturing locations: former Flextronics CEO Michael Marks envisioned complete supply-chain campuses in Mexico and Eastern Europe to serve customers on those continents. Former Sparton Electronics CEO David Hockenbrocht foresaw that keeping manufacturing in North America would appeal best to his regulated-industry customers; then in the last years of his tenure he pioneered (amongst his EMS peers) the building of a facility in Vietnam (when I asked why, he spoke about the comparatively high education and low labor rates there; I always wondered if his reasons came from his values as well).
I invite you to comment (below): Has your company’s CEO been instrumental in determining manufacturing locations? Does your company’s manufacturing-location strategy prioritize cheap labor rates or a regional strategy emphasizing customer responsiveness, risk mitigation, and smaller carbon footprint?
This week I had the pleasure of spending an hour with the CEO of a long-time supplier to the electronics manufacturing industry. Though it was our first meeting, we quickly got immersed in a conversation about the 5 or 6 largest electronics manufacturing services companies as if they were friends we each knew since high school. “Jabil and Flextronics made a go at becoming ODMs,” he said,” but it didn’t suit their strengths.” I heard myself say, “Celestica has always known who they are.”
What is it about EMS companies that has inspired investors to clamor over them despite the industry’s consistent, remarkably low profit margins? How did the “board-stuffing” suppliers – once only whispered about by the name-brand companies that outsourced to them — transform themselves into multibillion dollar international players with star-power executives such as Michael Marks and Tim Main?
From the perspective of having tracked and served the industry since 1985 (2 years before starting Technology Forecasters Inc.) when “board-stuffers” was actually an accurate and not pejorative moniker, I believe that it’s the personalities of the companies themselves that have won them fame (if not also fortune).
It was the people who loved building things who ran these companies originally – before visionaries and financial experts arrived on the scene. They had an earnest desire to build products better than the name-brand (former) product builders. They had the thrill of crossing the Atlantic then Pacific Oceans to open up facilities in Scotland and Ireland, then Singapore and Malaysia, then China and Eastern Europe, then Vietnam and Jordan (I’m projecting, now). Empire builders they were, and we all rooted for them, discussed them like favorite sports teams, and felt badly when they suffered.
So that’s why when we reflect today about these EMS giants and the challenges they face, it’s as if we are speaking about friends whom we wish well — even though mistakes were made (such as Solectron buying C-MAC), bubbles were burst (“I can be a product company if I want to be”), and profitability disappointed all (countless EMS executives dream to work for healthy-margin OEM companies).
Why do you think that the EMS industry has acquired such a high profile? It is sheer size, or something more? (Please leave a reply below.)
Post Note: I dedicate this blog entry to the memory of a real friend from the EMS industry, Scott L. Hudson, who this month while riding his motorcycle was killed by a drunk driver. Scott worked for EMS-company Sanmina-SCI and before then was a TFI Analyst. I will miss Scott as team member, client, and friend (remembering especially his love for sailing, international travel, and modern art). A memorial service will be held in Los Gatos, California, Sunday August 2nd from 4 to 7pm at the Los Gatos History Club.
This post’s title is borrowed from a chapter in Thomas L. Friedman’s book Hot, Flat, and Crowded. In the chapter, entitled “China for a Day (but Not for Two),” Friedman nearly wishes that the US Government would make as speedy and sweeping change as does China’s Central Government — that is when it’s for environmental and economic benefits. I thought of Friedman’s book chapter after a recent conversation with long-time China-based TFI Analyst Mark Natkin, who specializes in the telecom space in China and elsewhere in Asia.
This month Mark wrote in his newsletter the Marbridge Daily about China’s “Old-for-New” recycling program. In short, residents and organizations can trade in old consumer electronics and receive a 10% subsidy on the selling price of new consumer electronics. The program makes sense to me, and yet in China fashion the regulation is different from those in all other global regions. In fact “Old-for-New” is an even greater departure from the European Union’s WEEE Directive (reuse/recycling) than was China’s substance-labeling program from the EU’s RoHS Directive (substance restriction).
I asked Mark about China’s bold new law, and Mark said, “China is gradually working to improve the environment, both through recycling programs like the ‘Old for New’ program for consumer-electronics recycling, and also through use of more energy-efficient products, like “green” mobile-telephone base stations.”
Then he proceeded to give one person’s view of the impact of these laws, from the streets of Beijing: “We’ve had one of the most hospitable summers in my 7 years here – neither too hot nor humid and more blue skies than I ever thought possible for Beijing. I thought the clearer skies might be due, at least in part, to some improvements in environmental policy, such as replanting of forests between here and the Gobi Desert in the north, and even-odd license plate regulations. But the other day someone reminded me that one potentially major contributing factor is the economic downturn, which has seen a lot of factories reduce output (and the accompanying pollution).”
By the way, Friedman’s chapter “China for a Day” also reminded me of my 2004 visit to China (meeting executives at EMS and ODM companies in Shanghai and Suzhou), when with no apparent warning the Central Government banned filter-less cigarettes — without years-long deliberation by politicians in tobacco states or investments by the tobacco lobby. I found it both impressive and scary.
What do you think about China’s environmental policies and the way they are created?
One of the rewarding aspects of being consultants to electronics-company executives is the occasional opportunity to give away “freebies.” In this instance, I am pleased to report that this week one of our clients asked us to offer to TFI’s network a head start on enterprise-wide sustainability measurement, for free.
If you have not yet heard the term “enterprise carbon accounting” you can rest assured that — as with financial accounting — the smarter the tools and more automated the approach the easier it is to collect, analyze, and make decisions based on the data. Our client wants to work with sustainability champions at a handful of mid-sized-to-large electronics companies who aim to reduce environmental footprint in operations, facilities, product design, supply chain, and logistics.
If you work for an electronics contract manufacturer, electronic-product company, or component supplier (annual revenues of $500 million or more) and you are up to playing a sustainability-pioneer role, I look forward to hearing from you (PGordon@TFIenvironment.com).
Two weeks ago I co-led a four-hour Sustainability Workshop for a couple dozen executives sitting in a conference room 7,500 miles away, and I didn’t even need to pack a bag. Videoconferencing is a tool that could be used much more widely in the electronics and other manufacturing industries as a strategy to reduce the costs and environmental impact of air travel.
As we set up for the workshop, some clients at our location saw their colleagues at the distant location for first time, even though they’d been working together for some time. “Is that Linda? Hi, it’ Chris! Nice to ‘meet’ you!” –Big grins of delight.
I had the ability to angle the remote camera (it happened to be a PolyCom ViewStation EX) and see everyone in the workshop, ask questions of individuals, see and hear their responses, and gauge their understanding of the concepts.
On-site in the workshop room with the executives was TFI Environment Consultant Dr. Kim Allen (she was in the region). Kim says she appreciated the videoconferencing system because it made the workshop truly co-led. I appreciated Kim being “live-and-in-person”– especially to facilitate the hands-on exercises and judge the contest winners.
OK, what was the client’s ROI for using this productivity tool?
* For not flying me in for the half-day workshop, the client saved about US$6,500, for (1) airfare, (2) other standard travel expenses, and (3) my time (we bill travel time at half our consulting rate—not to exceed 8 hours of billing in a day).
* Next May when reporting emissions to the Carbon Disclosure Project, the client will enter 6,230 fewer pounds of CO2 emissions.
* Our clients got to schedule the workshop on their first-choice date. My schedule did not allow me to fly to the client location; it was the same day as our Quarterly Forum!
* From an internet search today, I found the same mid-range set-top conference-room system that the client owns for less than US$2,000 (for a new unit—it’s even less refurbished with warranty and technical support). The client used their existing, secure data and voice networks, so the operations costs were nominal.
There are many other systems and manufacturers from which to choose, ranging from a $35 attach-to-your-own-computer-screen camera used with the free or nearly free Skype service, to the Telepresence system (here’s a fun demonstration). To foster successful global supplier relationships without the cost and exhaustion of global travel, I especially like Tandberg’s wireless, hand-held videoconferencing unit—such as for seeing and resolving together an issue on the manufacturing floor.
Hey global TFI contacts: Maybe I will see you soon–with Skype at the very least. Extra points go to the first of you who arranges to meet with me using a Telepresence system.
Please share your experiences with videoconferencing so all can benefit: What was your company’s positive or negative ROI (e.g., did your equipment investment truly result in less employee travel?)? How did the cultural shift come about? Do you have a humorous story about videoconferencing?
Our clients are particularly yearning for innovation these days. This summer demand has surged for our supply-chain, logistics, and environmental strategy and research. After all, the tech industry wouldn’t be the tech industry without continued innovation. (The same goes for the apparel, medical, and other industries.)
To help clients competitively innovate for Leaner and Greener products, processes, and strategic corporate decisions, I encourage them to “leap frog” over sequential steps, and to think laterally for an entirely different and superior idea. Frogs leap 20 to 100 times their height to escape predators and catch lunch. Sidewinder snakes’ rapid sideways locomotion takes everyone by surprise (including hikers in the US Southwest).
Here’s an example of lateral thinking, of a low-tech variety. This week my husband asked our vegetarian, eco-minded neighbor. “Where do you get really good, water-treated, organic, shade-grown decaf coffee?” You see, being health and environmentally conscious, we have moved incrementally from drinking coffee to drinking decaf, then water-treated, then organic, and when possible shade-grown coffee. But our neighbor didn’t say a word. Instead, he yanked out of his garden a sprout of small, tapered green leaves. Then he said to my husband, “Why drink coffee when you can have delicious, fresh mint tea?”
It dawned on us: we had been taking sequential steps to mitigate a process fraught with inefficiency and environmental degradation. Our neighbor woke us up to thinking laterally: the point is that we want a healthy, hot, delicious beverage–why not drink a fresh, tasty “locally grown” alternative?
To help our clients with “leap and lateral” innovation, we lead two exercises called “Re-Think Products” and “What Comes Before?” We run these exercises within workshops for product designers, multifunctional/multiregional teams, and executives. The feedback we receive is that these exercises forever change the way participants make nearly every business decision, resulting in lower costs, use of fewer resources, and competitive distinction.
What leaps have you made or lateral thinking have you have had that you’d like to share and–together with our readers–build upon?
(By the way, though I haven’t yet completely given up my coffee, this garden-fresh mint tea is amazing.)
Global electronics companies are still outsourcing more manufacturing to China than to any another single country. Though early adopters are starting to shift to regional manufacturing, China is on top now. And China is arguably the world’s largest time bomb when it comes to environmental catastrophes (see “The River Runs Black: The Environmental Challenge to China’s Future” (Cornell University Press, 2004) — notwithstanding the 2008 Summer Olympics’ beautiful gardens and renewable-energy sports arenas. So, if the electronics industry does not focus Lean and Green efforts in China, then where?
You see, focusing solely on your own company’s footprint–albeit vital for competitiveness and cost-savings these days–is a farce in the world’s theatre. Consider that HP’s–like other electronics companies–own company’s energy usage is an estimated one-twentieth of its supply chain’s energy usage (according to Jay Celorie, a manager of HP’s social and environmental responsibility efforts). HP is focusing on reducing its supply-chain energy usage, as well as optimizing logistics networks, joining the Carbon Disclosure Project, and taking other steps to, as Celorie puts it, “prepare for a carbon-constrained society.” More companies, like HP, can reduce costs and risks by addressing their supply chains’ environmental efficiencies.
But try to apply the same approach to environmental training and strategy in China as you do in Western nations, and you may receive blank stares. The Chinese people have been converting used objects into new applications for millennia–so much so that there was no necessity for having a separate word for recycling with the same connotation as in the English language. Encouraging workers to generate grass-roots ideas for reducing waste can lead to a deafening silence; workers are accustomed to following their supervisors’ instructions only. (Solectron Shanghai (now part of Flextronics) experienced this initial reticence when training workers in Lean several years ago.)
We believe that the winning combination is teaming up an experienced global electronics-industry consultancy specializing in the environment (TFI Environment) with an energy and environmental consultancy with deep technical strength in China (WSP Environment and Energy, with offices in Beijing, Shanghai and Hong Kong). This team will be able to leverage proven methodologies for sweeping Lean and Green organizational changes and successful access to and influence with Chinese management at the OEMs and contract manufacturers companies there. That’s why my colleague Chris Hazen (Director of WSP Environment and Energy’s Asia-Pacific operations) and I have teamed up to provide strategic, results-oriented multifunction environmental consulting in China. Let me know (PGordon@TFIenvironment.com) if you’d like to know more.
What do you think is the winning combination to address the Lean and Green necessity in China?
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.
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.
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